Deere Earnings Review: Expect Weakness In Agricultural Equipment Demand To Continue

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Over the past few quarters, Deere (NYSE:DE) has managed to beat earnings expectations despite severe declines in revenue. Deere’s third fiscal quarter was no different, as the company beat earnings expectations by $0.09, reporting net profits of $1.53 per share. [1] However, unlike previous quarters, Deere’s stock took a dip as a result of a weak top line and outlook. We believe that the weakness in Deere’s results will likely continue due to weak demand for agriculture equipment.

  • Deere reported net sales and revenues of $ 7.6 billion, a decline of 20% year-on-year, beating market expectations by $420 million.
  • Deere expects its fiscal 2015 net sales to decline 21%, compared to its previous guidance of a 19% decline.
  • Deere has now revised its profit outlook back to $1.8 billion, after having increased it to $1.9 billion in the second quarter.
  • Deere reported a 24% year-on-year drop in the third fiscal quarter sales of its Agriculture and Turf equipment division, as it continued to be plagued by declining sales of its agricultural equipment. [1] Deere’s sales were also offset by strong foreign currency headwinds.

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Low crop prices across the globe, driven by bumper crop output in 2013 and 2014, have been severely impacting farmers’ income, discouraging them from purchasing new agricultural equipment or repairing existing equipment. However, the declines in Deere’s agriculture equipment sales have been moderating over the past few quarters. In the first and second fiscal quarters, Agriculture & Turf sales were down 27% and 25%, respectively. Despite the moderation, we expect to see the double digit declines to continue through the year.

Crop Prices Remain Low

The U.S. Department of Agriculture (USDA) expects a 32% year-on-year drop in U.S. farm income in 2015, to reach $73.6 billion, the lowest since 2009. [2] This is primarily due to the falling prices of crops such as corn and soybean. Per the USDA’s estimates, corn prices will decline to an average of $3.50 per bushel in marketing year 2015, compared to $4.46 per bushel in 2014. [3] Soybean prices are expected to decline from an average of $13.00 per bushel in marketing year 2014 to $10.00 in 2015.

Recently, the price of corn futures saw an uptick as crop scouts in the U.S. reported poor crop quality due to heavy rains, reaching $3.66 a bushel, surpassing the average price expected by the USDA. [4] The upwards movement of crop prices is indeed good news for Deere, as it means that the worst should be over for the company. However, it is important to note that corn prices are still very low compared to what they were in 2012. Additionally, current prices are very close to their average price estimate, which means that the USDA’s forecast still looks realistic for the time being.

The USDA will be releasing its next price forecasts on August 25, which we believe will point towards lower crop prices. According to the USDA’s crop production forecast released early in August, corn output will rise to 13.686 billion bushels, compared to its expectations a month ago for a 13.53-billion-bushel. [5] Soybean production will be 3.916 billion bushels, compared to a projection of 3.885 billion last month.

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Notes:
  1. Deere’s Q3 FY 2015 Media Release And Financials, Deere’s Earnings Releases [] []
  2. S. and State-Level Farm Income and Wealth Statistics, February 10, 2015, www.usda.gov []
  3. USDA Agricultural Projections to 2024, February 10, 2015, www.usda.gov []
  4. S. Soybean Prices Fall On August Rains; Corn Rises, August 18, 2015, Nasdaq []
  5. Crop Production, August 12, 2015, USDA Information System []