Deere Q3 Earnings Preview: Circumstances Have, If Anything, Deteriorated

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Deere & Company faces challenges in the agriculture sector due to low commodity prices, rising production costs, and cancelled orders from major buyers like China.Q2 report showed a 12.4% decline in ...

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Financial Services saw growth, but credit losses could be a concern.The forecast for fiscal 2024 predicts a 31.1% decline in net income. Challenges in the agriculture sector may continue, but the construction segment is expected to maintain stability.   DrewRawcliffe/iStock Editorial via Getty Images Preamble Back in April, an article was published highlighting potential reasons Deere & Company (NYSE:DE) (NEOE:DEER:CA) might fall short of investor expectations. In May, the stock declined following the Q2 report, aligning with some of the concerns raised in my piece. With the company's Q3 results due on August 15th, it's worth examining whether circumstances have shifted, potentially leading to a more positive outlook for the stock. Summary Of Deere’s Headwinds The agriculture sector, particularly in the US, is facing challenges that are impacting companies like Deere & Company. Despite the common belief that agriculture is a safe investment, many farming related ETF’s have floundered, the VanEck Agribusiness ETF (MOO) for example, indicating struggles in the whole sector. The global grain supply has increased due to factors such as the Russian government allowing hundreds of thousands of Chinese farmers to use free land. Other reasons can be found in my previously mentioned article, which have led to persistently low commodity prices. Despite the ongoing conflict in Ukraine, which is one of the most significant grain-producing countries, there have been depressed prices (See chart below). This poses a problem for US farmers, who are also grappling with rising production costs. The situation has been exacerbated by cancelled orders from major buyers like China, who are increasingly sourcing cheaper grains from countries like Argentina and Brazil. The combination of low commodity prices, high production costs, and lost orders creates a challenging environment for Deere, as farmers have less capital to invest in new equipment. Deere's Q2 report reflected these difficulties, with declining revenues and a gloomy forecast. In the company's primary market, US farmers are facing immense pressure, impacting their ability to purchase Deere's products and services. While potential interest rate drops could offer some relief to farmers, the overall outlook for Deere following the Q2 report remained uncertain. The convergence of low commodity prices, rising costs, and shifting trade patterns presented significant obstacles for the company and, as a consequence, its investors. Deere Q2 Earnings Report Summary Is there a more appropriate word to describe the Q2 results reported in the company’s last Form 10-Q than “ugly”? I don’t think the word “underwhelming” or “dismal” fully describes how bad they were. Although, to be fair, there were a couple of positives. Key Financial Metrics From the table, we can see that the company experienced a 12.4% decline in net sales and revenues for the three months ended April 28, 2024, compared to the same period in 2023. This decline was primarily attributed to lower sales volumes across various segments. We can also see that Net Income and EPS fell quite a bit; 17% and 11.5%, respectively.   Key Metric or Balance Sheet Item Three Months 2023 Value In Millions Three Months 2024 Value In Millions Percentage Change Compared to Prior Year   Net Sales and Revenues $17,387 $15,235 -12.40%   Net Income $2,860 $2,370 -17.10%   Diluted EPS $9.65 $8.53 -11.50%   Click to enlarge Financial Services was a bright spot, with a 22% increase in revenue for the three months ended April 28, 2024. This growth was driven by higher average financing rates and a 16% increase in the average balance of receivables and leases financed compared to the same period last year.  Financial Services Revenue $1,297 $1,588 22.50%  Click to enlarge However, the gains were partially offset by a higher provision for credit losses. Could this be another red flag I wonder? It wouldn’t be a stretch of the imagination to believe that credit losses could increase going forward as more and more farmers fail to maintain profitability in an era of declining commodity prices. Drop In Revenues By Geographical Region The filing also discusses the decline in revenues across different geographical regions. As you may note, the biggest drop in revenues occurred within the Latin America region, also accounting for the largest percentage drop. The report highlights lower shipment volumes to Brazil, a member of BRICS, as a key contributor to the decrease in net sales for this segment.   Region Three Months Ended April 30, 2023 In Billions Three Months Ended April 28, 2024 In Billions YoY Change (%)   United States $9.63 $9.22 -4.30   Canada $1.19 $1.18 -0.80   Western Europe $2.17 $1.86 -14.30   Central Europe and CIS $0.70 $0.45 -35.70   Latin America $2.24 $1.41 -37.10   Asia, Africa, Oceania, and Middle East $1.46 $1.11 -24.00   Click to enlarge  What To Expect In Deere's Q3 Earnings Report First of all, according to the press release for the Q2 report; “Net income attributable to Deere & Company for fiscal 2024 is forecasted to be approximately $7.0 billion.” To put this into perspective, net income for 2023 was $10.166 billion. That is a 31.1% nosedive, obviously not a reason for investors to pop the champagne corks. In fact, if their forecast comes to pass, one could easily deduce that there will be further falls in the stock price. The question is, how likely is it that the company will experience further drops. Well, given that the prices of soft commodities were pressuring US farmers, an uptick in prices would pave the way for an improvement in sales. However, if anything, the situation has worsened, as the price chart for soybeans illustrates. Chart of soybeans prices (Trading Economics) From data supplied by Trading Economics, it can be seen that soybean prices have slumped to $10.1 per bushel, “marking an almost 4-year low, driven by abundant supply and relatively low demand.” There has been a steady upward drift in exports from Latin America in recent years, and as far as I can see, the rise is likely to continue.   Grain Exports ( Baltic and International Maritime Council) Given the trends shown above, an increase in credit losses is certainly a strong possibility. Then there is the question of a recovery in revenues from South America. Well, in my view, this is unlikely for two reasons. First of all, why would Latin America farmers purchase Deere products when there are cheaper options available from, say, China? Then there is the downward drift in commodities. After all, Latin American farmers need to maximise their profits too. Outlook And Strategic Focus In the last report, Deere gave an insight into how the company would navigate the multiple challenges being faced. Whilst their agriculture segment was likely to be under pressure, the construction industry was expected to maintain stability. And, according to some reports, 2024 will indeed continue with modest growth. To quote; “the outlook is bleak for office and warehouse construction and iffy for retail and higher education. But these negatives will likely be outweighed by continuing strong growth in the construction of manufacturing plants, data centers, schools, infrastructure and power facilities.” The company also stated that price increases have been implemented across various segments to mitigate the impact of lower sales volumes and rising costs. And Deere expects to continue benefiting from price realization in certain markets. Manufacturing For sure, more details on cost savings will be announced to reassure investors that EPS will improve going forward. For instance, investors can expect further elaboration on the recently announced plan to move manufacturing to Mexico as early as 2026. Risks To Bearish Thesis Also mentioned in the Q2 report was a strategic focus on R&D and an emphasis on developing new technology. It may be that the company will announce new and innovative products that will sway buyers, both in the US and overseas, that the company has cost-saving solutions. It is possible that rate cuts will reduce pressure on farmers in the US that will allow them to finance big purchases from Deere. The additional profits to be gained from shifting manufacturing to Mexico will boost profits to such an extent that the market will determine that a higher share price is warranted, especially given that the current P/E (\"FWD\") is only 13.70 Summary Overall, in my opinion, Deere will indeed announce, as they have forecast, a lower net income. The company also stated that there will be increased credit losses going forward, which, I believe, will be confirmed in the next quarterly report, given that the situation for US farmers has deteriorated.  On a more positive note, the company has the cash to improve profitability through moving manufacturing to the lower cost jurisdiction of Mexico. There is also the possibility that their construction segment will maintain levels of revenues.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"preview","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.4","shortVersion":"4.29.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2458708605"}