Text size
Wall Street is starting to wonder if the current environment is as good as it gets for Deere.
Justin Sullivan/Getty Images
Deere
crushed Wall Street’s earnings estimates and increased fiscal-year financial guidance. The stock, however, was down. Current results were great, but investors are worried about whether the current phase of rising demand for agricultural equipment is over.
For its fiscal third quarter that ended in June, Deere (ticker: DE) reported earnings per share of $10.20 from equipment sales of $14.3 billion. Wall Street was looking for earnings of $8.22 a share on equipment sales of $14.1 billion. A year ago, Deere reported profit of $6.16 a share from equipment sales of $13 billion.
Deere also raised guidance on Friday. For fiscal 2023, Deere now expects net income of between $9.75 billion and $10 billion. In May, the guidance range was $9.25 billion and $9.5 billion, while in February management expected $8.75 billion to $9.25 billion.
The roughly $500 million increase is close to the amount by which Deere beat Wall Street’s third-quarter estimates.
Deere stock was down 4.9% in midday trading, while the
S&P 500
was flat and
Dow Jones Industrial Average
was up 0.1%.
It is a surprising move for a big earnings beat. Fears about the top of the agricultural business cycle have been creeping in. “Moving to a more cautious stance on Ag OEMs,” wrote Baird analyst Mig Dobre in a report earlier this week. OEM is short for original equipment manufacturer and refers to companies such as Deere.
Dobre said dealers are restocking inventory, which is good for current results but less good for performance down the road. When their inventories are full, dealers don’t order more products.
Another reason for caution is that U.S. farm income is falling as crop prices moderate, leaving farmers less flexibility in buying gear. The U.S. Department of Agriculture forecasts about $151 billion in 2023 net farm income, down about 20% from 2022.
Dobre also sees gains in prices for used ag equipment moderating and costs starting to catch up with prices for new gear. He expected Deere to beat earnings estimates for its fiscal third quarter, but said “we recognize a tougher nine to 12-month setup [for shares].”
Dobre still rates Deere stock a Buy and has a price target of $445. So does Citi analyst Timothy Thein. His price target is $475 a share. Thein called results solid in a Friday report.
Overall, Wall Street likes Deere stock, but the ratings reveal a hint of worry. About 69% of analysts covering shares rate them Buy, while the average Buy-rating ratio for stocks in the
S&P 500
is about 55%. Four months ago, however, 73% rated shares a Buy.
The average analyst price target is about $456 a share, up about $6 over the past four months.
Target prices moved up after Deere reported its fiscal second-quarter earnings in May. Deere stock has risen about 13% since the report. The
S&P 500
has gained about 4% over the same span.
Target prices might go up again after another strong set of quarterly numbers from the farming giant. Concern about the agricultural business cycle will remain, though.
Investors might be waiting for Deere’s fiscal year 2024 outlook, due in November. Management highlighted a healthy order book on the earnings conference call. That is positive, but mainly ensures a strong finish to fiscal year 2023.
Write to Al Root at [email protected]
Source: https://www.barrons.com/articles/deere-earnings-stock-friday-bf70ec38?siteid=yhoof2&yptr=yahoo