Deere Earnings Plow Through Expectations; Company Hoists Guidance

Caterpillar's poor outlook for heavy equipment sales is compounded by further bad news.

Deere Earnings Plow Through Expectations; Company Hoists Guidance

Deere (DE), despite concerns about the economy and farm prices, easily exceeded earnings estimates for the fiscal second quarter early Friday. DE stock rose, signaling that the company is moving back towards key technical levels.

The iconic maker of green-and yellow agricultural equipment is considered a bellwether in the farming economy. Deere makes heavy machinery that is used in the construction and forest markets.

Deere Earnings

FactSet consensus estimates predicted that Deere's earnings for Q2, which ended April, would grow by 26%, to $8.58 a share. The total revenue was expected to increase by nearly 20% from a year ago, reaching $15.993 billion.

Results: Deere's earnings increased by 42%, to $9.65 per share. This is a slight slowdown compared to the 124% increase in the first quarter. The revenue grew 30%, to $17.39 Billion, which was above expectations but still a second consecutive quarter of slower sales growth. Sales of precision agriculture and production increased by 53%. Sales of smaller agriculture and turf products grew by 16%. Construction and forestry sales grew 23%.

John May, CEO of Deere, said that the company continues to benefit from favorable operating conditions and a favorable market environment.

Deere's outlook is now $9.25 to $9.50 billion in net income for the full year, up from its previous target of $8.75 to $9.25. FactSet reports that analysts had predicted a net profit of $9.06billion.

DE Stock

Deere shares rose 3.8% on the stock exchange in the early hours of trading today. This indicates a return to levels above the short-term technical support and a move towards the 50-day moving-average.

The MarketSmith chart shows that the DE stock reached its peak in November last year and has since been trending downwards, with the 10-week moving median now below the 40 week line.

Caterpillar and United Rentals are also headed lower and below key values.

Farm Machinery Prices

According to the latest commodity market outlook from the World Bank, Texas Farm Bureau on May 18 said that the World Bank expects agricultural commodity prices to drop by 7% in this year. They will also likely decline again in 2024.

In recent years, prices for all types farm equipment have risen for similar reasons that drove auto prices to record highs. Lower farm commodity prices may increase demand for farm equipment as supply chain issues and consumer demand balance.

Caterpillar, the construction giant, also gave a gloomy outlook in April for its equipment sales. United Rentals, a company that rents scissorlifts and heavy equipment, also released a mixed report.

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 in May.

Arnold also added that "a slowing economy could harm Deereā€™s construction and forest markets."

The analyst still rates DE as a buy citing the long-term drivers for growth and valuation.

Deere gave an optimistic outlook for 2023 in April, citing a "healthy demand" for construction and farm equipment.

Deere's earnings for the first quarter of 2009 showed a marked improvement. Price increases exceeded cost inflation.

Deere's earnings also benefited from fewer supply disruptions as well as higher production volumes.

The DE stock has declined by 14% over the last year, while remaining almost flat. The farm stock is headed for its sixth consecutive monthly decline in May.

Deere shares pay a dividend yield of 4.1%.