Ag Tech Giant Deere Lowered Guidance as Farming, Construction and Forestry all Hit by Slowing Demand

Iconic farming, forestry and construction equipment maker Deere reported earnings before the open Friday. DE saw net income in the fiscal fourth quarter of $2.37 billion, or $8.26 a share, up from $2.25 billion, or $7.44 a share, a year earlier and ahead of the consensus estimate of $7.41 a share. Revenue fell 1% from a year earlier to $15.4 billion in the fourth quarter, however it beat the consensus estimate of $13.66 billion. The company saw its stock fall over 7% after it warned of lower income ahead as sales volumes “return to mid-cycle levels.” The stock did recover to be down 3.1% at the close.

The company is now seen as a rare hybrid of industrials and tech or Ag Tech. That said, companies like Caterpillar (CAT) move in many of the same spaces, Construction & Forestry is the DE segment that competes the most with CAT. Supply chain issues are in focus in these globally troubled times. ARK Invest sees DE as a tech company adding it to ARKQ. 

Deere China

Fiscal Q4 2023 Earnings

Highlights

  • Net income $2.37 billion, or $8.26 a share, up from $2.25 billion, or $7.44 a share, a year earlier, beat the consensus estimate of $7.41 a share.
  • Revenue fell 1% from a year earlier to $15.4 billion in the fourth quarter, beating the consensus estimate of $13.66 billion.

Market Reaction

Deere & Co. November 22, 2023 • 3:00 PM NYSE: DE (Updated)

  • 370.76 -11.89 (3.11%) Open 360.02 High 373.34 Low 355.661
  • 370.76 -66.76 (15.26%) over past year
  • 370.76 +228.19 (160.05%) over past 5 years

“While our end markets will fluctuate, we remain focused on disciplined execution and strategically investing in solutions that drive customer value,” John May, chairman and chief executive of Deere, said in a statement. “As evidenced by our guidance for 2024, we are demonstrating higher levels of through-cycle structural profitability while making our company more resilient and better equipped for the future.”

Deere has benefited from demand strength, coupled with improved operating and supply chain conditions as the economy recovered globally. However, the ongoing property woes in China, the wars in Ukraine and now the Middle East all affect demand and potentially supply. With that the company lowered its outlook.

Outlook

The world’s biggest tractor maker expects net income of $7.75 billion to $8.25 billion in fiscal-year 2024, down from $10.17 billion in 2023, as sales volumes “return to mid-cycle levels.” The move was lower than Wall Street analysts average forecasts of net income of $9.31 billion for next year.

  • Forecast sales in its small agriculture and turf segment will fall 10% to 15% in fiscal 2024.
  • Forecast sales decline of 15% to 20% in its production and precision agriculture segment,
  • Forecast sales decline of around 10% drop for construction and forestry.

The effects of inflation have hit smaller agriculture significantly. Smaller scale farmers have been hurt by rising costs of production as inflation hits everything from fertilizer to seeds to pesticides. It also hits the demand for many products with the consumers net income and their affordability to purchase hit.

DE has been able to collect higher prices for its machinery, offsetting persistent manufacturing, labor, and freight cost pressures. However, that has its limits with higher interest rates and continued strike action in many of its end markets.

One benefit of note, that unlike competitor Caterpillar, DE has less exposure to negative FX headwinds. With roughly 57% of its revenue coming from overseas markets, CAT is especially vulnerable to the strengthening dollar.

A strong farming industry is a major catalyst behind DE’s performance being its largest segment of around 46% of total revenue. This sector is vulnerable to crop prices and farming incomes changes. When farmers are buoyant, they are upgrading their equipment and investing in pricier precision agriculture machines to improve yields and efficiency. Given the high costs now affecting farmers DE downgraded between 10 and 20% its farming segments.
The company is also of the return of supply chain disruptions hitting production.

Construction & Forestry is the segment that competes the most with Caterpillar. In the past strong demand for heavy machinery like loaders, dozers, and excavators enabled DE to rise prices without sacrificing volume. However, we have seen lower infrastructure spending with higher interest rates and lower commodity prices which are seen to affect DE’s results in this segment next year.

Late last month in its earnings conference Caterpillar noted ongoing weakness in China, as well as a shrinking order book, that offset solid September quarter earnings.

“As we have mentioned during previous earnings calls, we anticipate continued weakness in China, and expect it to remain well below our typical range of 5% to 10% of enterprise sales,” CEO Jim Umpleby told investors on October 31. “In EAME, we anticipate the region will be slightly down as weakness continues in Europe, partially offset by continuing strong construction demand in the Middle East. Construction activity in Latin America is expected to be about flat versus strong 2022 performance.”

Given Deere’s higher exposure to the weaker consumer end market, it’s unsurprising that DE’s Small Agriculture & Turf segment has seen its forecasts lowered. Sales for riding mowers, utility tractors, and other smaller equipment are most vulnerable when incomes become strapped.

  • Commodity and crop prices were elevated in an inflationary environment, which created higher incomes for farmers. This enabled many farmers to replace aging fleets of tractors and combines. Inflation has since been decelerating, yet high input prices remain, we are seeing that affect in the guidance for next year.
  • Corn and soybean prices are down about 29% and 4%, respectively, over the past year. Farm income is projected to be $141 billion in 2023, according to the U.S. Department of Agriculture, down from $183 billion in 2022.
  • Increased investments in infrastructure projects are bolstering demand for heavy machinery within DE’s Construction and Forestry segment. In Q4, revenue in this business grew by 20% to $3.37 bln and operating profit jumped by 53% to $414 mln.
  • Technology improvements, including smart technology, have made DE’s equipment more efficient and cost effective. With expenses climber higher across the board for farmers, more efficient equipment is one way to mitigate the cost pressures.

The hardships around the COVID lockdowns saw Deere achieve better production efficiencies from higher shipment volumes and with the higher prices it pushed margins and profits sharply higher in each of DE’s businesses. DE was able to successfully increase prices because the fundamentals underlying the farming industry were healthy. While these have weakened that improved base gives the company a solid cushion.

Wirtgen Aquisition

Deere Wirtgen

The Wirtgen acquisition a few years ago expanded DE into the road construction business that is in a position to gain massively from infrastructure spending plans. Keep an eye on promises in an election year here.

Competitors include Caterpillar (CAT), Manitowoc (MTW) and Terex (TEX).

Source: Deere, AlphaStreet

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