monastery (DE) headed higher for fiscal 2023 early on Friday, after easily beating second-quarter earnings estimates due to healthy demand for equipment. DE stock jumped to grab a key level, then reversed lower.
On the earnings call, Deere management noted that its second-quarter results benefited from increased production from the latter half of 2023.
That led to concerns about lower sequential sales in the current third quarter, analysts said, as the second quarter marks the peak production for the year.
Deere may have to “manage inventory levels with lower production, in order to exit the year in good shape given heightened end market concerns due to lower crop prices,” William Blair analyst Lawrence DiMaria told IBD in an email.
Tractor maker Deere is seen as a pioneer of the farm economy. It also manufactures heavy machinery for the construction and forestry markets.
estimatesFor the quarter ended April 30, Deere’s earnings were expected to grow 26% to $8.58 per share, according to FactSet consensus estimates. Total revenue was seen up nearly 20% versus a year ago to $15.993 billion.
results: Deere’s earnings jumped 42% to $9.65 a share, though that’s a slowdown from 124% in the first quarter. Revenue swelled 30% to $17.39 billion, above expectations, but still in its second consecutive quarter of slowing sales growth.
Produce and precision farming sales jumped 53%. Small farmland and turf sales grew 16%. Construction and forest sales increased by 23%.
“Deere continues to benefit from favorable market conditions and an improved operating environment,” CEO John May said in Deere’s earnings release.
“Although supply chain constraints remain a challenge, we are seeing further improvement,” May added.
prospects: Deere now expects full-year net income of $9.25 billion-$9.50 billion, versus its previous target of $8.75 billion-$9.25 billion. FactSet shows that analysts expected net income of $9.06 billion.
DE stock fell
Shares of Deere closed down 1.9% at 363.55 in the stock market today, pulling back below its 50-day moving average. DE stock rose 6% to 393 in the Friday morning session, going 50 days for the first time since early April.
Deere stock peaked last November and has been trending lower, with its 10-week moving average now below its 40-week line, as MarketSmith’s chart shows.
Larva (cat), CNH Industrial (CNHI) And United Rentals (URI) are also trending down and below key levels. CAT stock was almost unchanged at 214.79 on Friday. CNHI lost 0.1%, while URI rose 1.3%.
The “wise” move towards production
Edward Jones analyst Matt Arnold told IBD on Friday that Deere’s management “prudently limits production to ensure dealer-level inventories remain lean”.
That “would make for another strong year in 2024,” he added.
The move comes with the outlook for Deere’s end markets under scrutiny.
The World Bank expects agricultural commodity prices to fall 7% this year and are likely to fall again in 2024 Texas Farm Office he said on May 18.
Prices of all types of agricultural equipment have skyrocketed in recent years for reasons very similar to those that have pushed automobile prices to record highs. As demand and supply chain issues begin to balance, lower farm commodity prices could put more pressure on farm equipment sales.
In April, construction giant Caterpillar gave a dim outlook for equipment sales as well. United Rentals, which rents scissor lifts and a range of heavy equipment, filed a mixed report the same month.
Year-to-date, Deere stock is down about 15%. Pays 1.3% dividend yield.
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