Deere (DE, Financial) has surpassed earnings per share (EPS) estimates for the seventh consecutive quarter by maintaining strict control over expenses. However, the company’s impressive Q2 performance is overshadowed by its second downward revision of the FY24 net income guidance within two quarters. Deere now anticipates a net income of around $7.0 billion, marking an estimated year-over-year decline of about 31%. The weakening in farming fundamentals is largely responsible for this dimmer outlook.
- Deere's profit forecast adjustments were influenced by significant drops in crop prices, notably a 21% year-over-year decrease in corn prices and a 13% fall in soybean prices, reducing farmers' spending power on new machinery and equipment.
- Agco (AGCO, Financial) also hinted at potential industry-wide issues when it missed its Q1 revenue targets and provided a lower FY24 EPS forecast on May 2, which was a precursor to Deere's disappointing guidance update.
- Deere reported a more than 15% year-over-year revenue decline to $13.6 billion in Q2, marking its steepest drop since the pandemic-affected quarter of 2Q20. The Production & Precision Ag segment, previously buoyed by record farming income, saw a 16% decline in sales to $6.58 billion and a 260 basis point contraction in operating margin to 25.1%.
- Looking ahead, Deere expects no immediate recovery, projecting a 20-25% decrease in sales for its largest revenue segment, Production & Precision Ag, worsening from an earlier forecast of a 20% drop.
- The Small Agriculture & Turf segment, which includes smaller tractors and lawn mowers, also faced a 23% sales decline in Q2, with a forecasted 20-25% drop for FY24, adjusted from an initial 10-15% decline. This segment is particularly affected by sluggish consumer spending and high interest rates.
- The Construction & Forestry segment, however, experienced a relatively modest 7% decrease in net sales to $3.8 billion, with CEO John May noting stability in construction end markets. For FY24, the construction market in the U.S. and Canada is expected to be flat to down by 5%.
The overarching theme from Deere's latest earnings report is a further weakening in agriculture fundamentals, exacerbated by disinflation impacting farming incomes. It's crucial to note that Deere is comparing against a notably strong Q2 the previous year, where revenues surged by 34%, which adds important context to its current results and projections.
