Deere (DE) guided higher for fiscal 2023 early Friday after easily topping earnings estimates for its second quarter. DE stock jumped to seize a key level, then fell in choppy trade.
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Tractor maker Deere is seen as a bellwether for the farm economy. It also makes heavy machinery for the construction and forestry markets.
“Expectations were clearly high going into today and Deere handily beat consensus despite some headwinds,” William Blair analysts said in a note to clients Friday.
Baird analysts Lawrence De Maria and Ross Sparenblek rate shares at outperform. The Deere earnings call Friday morning should offer more insight on outlook and orders, they added, “considering the recent negative move in commodity prices.”
Deere Earnings
Estimates: For the quarter ended April 30, Deere earnings were forecast to grow 26% to $8.58 per share, according to FactSet consensus estimates. Total revenue was seen rising nearly 20% vs. a year earlier to $15.993 billion.
Results: Deere earnings jumped 42% to $9.65 a share, though that’s a slowdown from 124% in the first quarter. Revenue swelled 30% to $17.39 billion, above expectations, but still the second straight quarter of slowing sales growth.
Production and precision agriculture sales leapt 53%. Smaller agriculture and turf sales grew 16%. Construction and forestry sales rose 23%.
“Deere continues to benefit from favorable market conditions and an improving operating environment,” CEO John May said in the Deere earnings release.
“Though supply-chain constraints continue to present a challenge, we are seeing further improvement,” May added.
Outlook: Deere now sees full-year net income of $9.25 billion-$9.50 billion, vs. its prior target of $8.75 billion-$9.25 billion. Analysts had forecast net income of $9.06 billion, FactSet shows.
DE Stock
Shares of Deere gapped up 3.9% on the stock market today, clearing the 50-day moving average for the first time since early April. But Deere stock wobbled between gains and losses in midmorning trade, falling back below the 50-day line.
DE stock peaked last November and has been trending lower, with the 10-week moving average now below the 40-week line, the MarketSmith chart shows.
Caterpillar (CAT) and United Rentals (URI) are also heading lower and below key levels. CAT stock and URI stock rose 1.6% each Friday.
Farm Prices, Machinery Sales
The World Bank projects agricultural commodity prices will drop 7% this year and will likely fall again in 2024, the Texas Farm Bureau said on May 18, citing the bank’s latest commodity markets outlook.
Prices for all types of farm equipment soared in recent years for reasons very similar to those that drove automobile prices to record levels. As supply chain issues and demand begin to balance, lower farm commodity prices could place additional pressure on demand for farm equipment.
In April, construction giant Caterpillar gave a lackluster outlook for equipment sales as well. United Rentals, which rents out scissor lifts and a range of heavy equipment, turned in a mixed report at the same time.
Risks For Deere Stock
Downside risks for Deere include “a decline in farm commodity prices, which could be pressured by either stronger-than-expected crop yields or trade disagreements with U.S. export partners,” Edward Jones analyst Matt Arnold said earlier in May.
Further, “slowing economic growth could hurt Deere’s construction and forestry markets,” Arnold added.
Still, the analyst rates DE stock a buy, on valuation and long-term drivers of growth.
Year to date, the farm stock is now down around 14%. Deere stock pays a 1.3% dividend yield.
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