Things are looking good down on the farm. Agricultural equipment giant
Deere
smashed earnings expectations and it raised fiscal-year financial guidance.
All that wasn’t enough to keep investors happy.
Deere (ticker: DE) reported fiscal second-quarter earnings per share of $9.65 from about $16 billion in equipment sales.
Wall Street was looking for earnings of $8.58 a share on equipment sales of $14.9 billion, according to FactSet. A year ago, Deere reported earnings of $6.81 a share on sales of $12 billion.
Operating profit in the company’s large agricultural equipment business came in at $2.2 billion, up from $1.1 billion a year ago. Pricing and volume gains added more than $1.5 billion with only small cost increases offsetting some of the gains.
Operating profit in the company’s construction business was $834 million, up from $814 million a year ago.
For all of fiscal 2023, Deere expects net income of between $9.25 billion and $9.5 billion. In February, management said it expects fiscal 2023 net income of $8.75 billion to $9.25 billion. The roughly $300 million increase in guidance is about the amount by which Deere beat Wall Street estimates.
This is the second consecutive quarter that management has raised guidance.
“As shown by the company’s outstanding second-quarter results, Deere continues to benefit from favorable market conditions and an improving operating environment,” said CEO John May in a news release. “Though supply-chain constraints continue to present a challenge, we are seeing further improvement.”
The biggest quarterly disappointment might be financial service income. Deere’s lending business generated $28 million in income, down from $208 million a year ago due to “less-favorable financing spreads and a higher provision for credit losses.”
Still, it looked like a solid quarter. TD Cowen analyst Matt Elkott called the quarter a “strong all-around beat” in a report Friday. He rates shares Hold and has a $443 price target on the stock.
Deere shares were up 3.8% in premarket trading Friday, but have given up gains and sit at $365.11, down 1.5%, in late trading. The S&P 500 and
Dow Jones Industrial Average
are down about 0.1% and 0.3%, respectively.
A decline in the stock after a beat-and-raise quarter continues a trend. Investors aren’t sure what to do with Deere. Heading into Friday trading, the stock has slipped about 14% so far this year, and has declined about 14% over the past three months. The S&P 500 has gained about 8% so far this year, and has risen about 3% over the past three months.
It’s possible investors think things can’t get better for Deere. Full-year earnings are expected to come in around $31 a share, a record. Management did say on its quarterly conference call that pricing trends should normalize as inflation subsides, reducing a recent tailwind to sales and earnings.
Wall Street appears to be more upbeat than investors. Overall, 70% of analysts covering the shares rate them Buy. That’s high. The average Buy-rating ratio for stocks in the S&P 500 is about 53%. The average analyst price target on Deere stock is about $476 a share.
Citi analyst Timothy Thein is one of the bulls. He saw a good quarter coming and was impressed by pricing. “The positive spread between pricing and production costs continued to widen,” wrote the analyst in a Friday report. “But to a larger degree than we expected.”
Thein rates Deere stock Buy with a $505 price target. That values the shares at roughly 16 times estimated fiscal year 2023 earnings, 33% higher than the current 12 times price-to-earnings ratio.
Not everyone is as bullish as Thein. Bernstein analyst Chad Dillard, like Thein, says the focus should be on 2024. But he has some concerns, writing this week the outlook paints “an increasingly cautious picture.”
Corn prices are sitting at about $5.60 a bushel, down from more than $7.50 a bushel a year ago, when corn was near a record. Corn, and other food commodity prices, determine farm income, which determines what farmers can spend on Deere tractors and combines.
Dillard has a Hold rating on Deere stock with a $367 price target, right around where the stock has traded recently. He wrote Friday that while Deere had a beat-and-raise quarter, “peak [cycle] concerns live on.”
Dillard has his concerns. Still, corn prices above $5.50 are good, historically speaking. Prices have averaged about $4.70 for the past 10 years. And, overall, more analysts feel like Thein than Dillard.
Time will tell if investors come around to Wall Street’s way of thinking.
Write to Al Root at [email protected]
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