Deere shares took a beating early Wednesday after the agricultural equipment giant slashed fourth-quarter earnings estimates but warned of a double-digit percentage drop in sales for the new fiscal year.
Citing a return to “mid-cycle” sales levels, Deere’s outlook calls for a sharp decline in profitability in fiscal 2024.
“While our end markets will fluctuate, we remain focused on disciplined execution and strategic investments in solutions that drive customer value,” said CEO John May in the earnings statement. “As evidenced by our 2024 guidance, we are demonstrating higher levels of structural profitability through the cycle, while making our company more resilient and better positioned for the future.”
The minutes of the Federal Reserve’s October 31-November 1 meeting, released on Tuesday, included a comment that higher interest rates were having an impact on the agricultural sector. Members of the Fed’s policy-setting committee said their contacts noted that “high financing costs were likely weighing on purchases of heavy farm equipment”.
Deere is also likely to be seeing the same kind of shift that was seen in Caterpillar’s Q3 earnings report, which showed a sharp decline in its backlog. This comes as equipment dealers no longer need to build up their inventories. As supply chains normalise, there’s less urgency to prepare for unexpectedly strong demand.
Deere earnings
Deere posted fourth-quarter earnings per share of $8.26, up 11% year-over-year and 80 cents ahead of estimates, according to FactSet. Revenue fell 1% to $15.41 billion, a smaller decline than analysts expected.
Net income rose 43% to $10.166 billion in fiscal 2023, with a more modest 5% increase in the fourth quarter. But Deere’s outlook for fiscal 2024 net income is between $7.75 billion and $8.25 billion, down 19% to 24%.
Deere expects the US market for large farm equipment to decline between 10% and 15% next year, with smaller equipment down 5% to 10%. However, Deere expects its own sales to decline at least as much: 15% to 20% for production and precision equipment, and 10% to 15% for smaller equipment.
Deere’s outlook for the construction sector isn’t quite as bleak, with a 5-10% decline for the market as a whole.
DE shares
Deere shares were down 5.8% at 360.55 on Wednesday morning. That leaves Deere just above a six-month low and about 20% below its recent high in late July.
CAT shares fell 2.2%, while AGCO lost 1.7%.
