Deere shares rally on better than feared results; Data points to a slow down not a recession

Deere & Company (DE) reported strong Q3 results that exceeded analyst expectations despite significant headwinds in the agricultural and construction sectors. The company posted Q3 EPS of $6.29, well above the consensus estimate of $5.63, driven by higher prices which helped offset the impact of slowing demand for new machinery amid declining crop prices and high borrowing costs. Net income for the quarter fell by 42% year-over-year to $1.73 billion, yet still surpassed the expected $1.59 billion. Net sales dropped by 20% year-over-year to $11.39 billion, but again, this was better than the anticipated $10.84 billion.

In the Production & Precision Agriculture segment, net sales declined by 25% year-over-year to $5.10 billion, beating the estimate of $4.77 billion. The operating profit for this segment decreased by 35% to $1.16 billion, but the operating margin of 22.8% was stronger than the expected 18.9%. The performance was aided by price realization despite lower shipment volumes, reflecting the segment’s resilience in a challenging market.

The Small Agriculture & Turf segment also experienced a downturn, with net sales declining 18% year-over-year to $3.05 billion, though this was ahead of the expected $2.85 billion. The segment’s operating profit fell by 32% to $496 million, but operating margins remained relatively strong at 16.2%, above the estimated 13.5%. The results were supported by price increases, which partially offset lower shipment volumes.

The Construction & Forestry segment reported a 13% year-over-year decline in net sales to $3.24 billion, slightly missing the estimate of $3.31 billion. The segment’s operating profit dropped by 37% to $448 million, with operating margins at 13.8%, below the expected 17.8%. The decline was attributed to lower shipment volumes and an unfavorable sales mix, reflecting the broader slowdown in construction activity.

Looking ahead, Deere revised its outlook downward for all its major segments. The company now expects Production & Precision Agriculture and Small Agriculture & Turf net sales to decline by 20% to 25%, more pessimistic than previous expectations. Similarly, the Construction & Forestry segment is projected to see a 10% to 15% decline in net sales, down from the earlier forecast of a 5% to 10% decline. Despite these lowered expectations, Deere maintained its full-year net income guidance at approximately $7 billion, close to the consensus estimate of $6.94 billion.

Deere’s commentary on the broader market outlook remains cautious, with the company noting that global agricultural fundamentals are expected to remain weak, and construction markets are likely to moderate further. These challenges have prompted Deere to take cost-reduction measures and strategically align its production with current market demand, aiming to maintain its competitive position.

In summary, despite a challenging environment, Deere outperformed expectations on both revenue and EPS for Q3, driven by effective pricing strategies and disciplined execution. However, the outlook for the remainder of the fiscal year reflects the ongoing pressures in its key markets, particularly in agriculture and construction. The company remains focused on cost management and strategic adjustments to navigate these headwinds while continuing to invest in innovation and customer solutions.