Deere Q4 Earnings Beat, Stock Falls on Tepid Outlook

Deere & Company (DE) reported slightly better-than-expected earnings results for the fourth quarter. However, the shares fell 4% in pre-market trade. The company provided a tepid outlook for fiscal 2020.

Deere’s fourth-quarter adjusted EPS of $2.14 beat analysts’ estimate by $0.01. However, the earnings fell 7% YoY (year-over-year). Increased production and operating costs more than offset the benefit of higher revenues.

For the fourth quarter, Deere reported equipment operation revenues of $8.7 billion, which beat analysts’ expectations of $8.53 billion. The sequential revenues also marked 4% YoY growth due to robust sales across all of its business segments.

The company’s Agriculture & Turf segment’s sales grew 3% YoY to $5.76 billion. Better price realization and increased volumes mainly drove the top-line growth. However, an unfavorable foreign currency exchange rate partially offset the benefits mentioned above.

Deere’s Construction & Forestry segment’s sales grew 8% YoY to $2.95 billion. The company cited higher shipment volumes and better price realization as the main reasons behind the segment’s revenue growth.

What hurts Deere Q4 earnings?

Despite higher revenues, the equipment operation operating profit fell 9% YoY to $788 million. The company’s operating margin contracted by 120 basis points YoY to 9.1%. Deere said that the margin contracted due to higher production costs, increased selling, general, and administrative expenses, and unfavorable currency exchange rates.

The Agriculture & Turf segment’s operating profit fell 7% YoY to $527 million. Apart from the factors mentioned above, increased research and development costs and an unfavorable sales mix contributed to the dismal operating performance.

The operating profit for Deere’s Construction & Forestry segment fell 12% YoY to $261 million. The company pointed out similar factors that impacted the Agriculture & Turf segment’s operating profit.

Deere’s fiscal 2019 earnings highlights

Deere’s fiscal 2019 revenues increased 5% YoY to $34.89 billion and beat analysts’ estimate of $34.64 billion. The operating profit of $3.72 billion was 1% higher than in fiscal 2018. Deere’s fiscal 2019 earnings grew 4% YoY to $9.94 billion and beat analysts’ expectations by a few cents.

The Agriculture & Turf segment’s revenues increased 2% YoY, while the operating profit fell 11%. The Construction & Forestry segment’s sales grew 10%, while the operating profit increased 40%.

Dismal fiscal 2020 outlook

Deere expects a net income of $2.7 billion–$3.1 billion in fiscal 2020, which is lower than analysts’ expectation of $3.45 billion. The company’s net income guidance also shows a YoY decline of 5%–17%. The company’s tepid fiscal 2020 outlook reflects soft demand for farm equipment due to weakness in the agricultural sector and trade uncertainties.

The company expects the Agriculture & Turf segment’s sales to fall 5%–10% in fiscal 2020. Deere expects the agricultural demand in the US and Canada to fall 5% YoY due to lower demand for large equipment. The company expects its sales in Europe, South America, and Asia to remain flat YoY.

For the Construction & Forestry segment, Deere expects the revenues to fall 10%–15%. The weak sales guidance reflects slowing construction activity and the company’s efforts to manage dealer inventory levels.

Peers’ performance

Deere’s peers are also feeling the pinch of trade uncertainties, which is reflected in their latest quarterly results. Last month, AGCO (AGCO) reported a YoY decline in its third-quarter revenues and profits of 4.8% and 9.9%, respectively.

Caterpillar’s (CAT) third-quarter top-line and bottom-line results fell 6% and 6.3%, respectively. CNH Industrial (CNHI) registered an 11.9% decline in its third-quarter revenues, while its earnings remain flat YoY.