Why Deere Might Post Dismal Q4 Earnings Results

Analysts expect Deere & Company (DE) to report dismal fourth-quarter earnings results on Wednesday. Although the company has missed analysts’ expectations in trailing six quarters, it has always reported earnings growth. For the third quarter, analysts’ projection stated that the earnings would fall 7.3% YoY (year-over-year) to $2.13 per share.

What could hurt Deere’s Q4 earnings?

Sluggish top-line growth will likely weigh on Deere’s fourth-quarter earnings. Analysts expect the company’s revenues to increase 2.2% YoY to $8.53 billion in the fourth quarter. Notably, the top-line growth estimate is the second-lowest revenue growth that Deere has recorded in the previous nine quarters. Soft top-line projections reflect a slump in farm equipment demand due to trade uncertainties and weakness in the agricultural sector.

The ongoing trade war between the US and China impacts the overall US agricultural industry. Notably, China imposed a 25% import tariff on several US farm products last year in July. The country also hiked the tariffs on some US agricultural products in September.

China’s tariffs hurt agricultural exports in the US, according to data compiled by the American Farm Bureau. Notably, China makes up approximately 20% of the total US farm product exports. Last year, the US farm product exports to China fell by more than 50% to $9.1 billion from $19.5 billion in 2017. Farm Bureau economists think that the US farm product exports to China could be wiped out entirely this year.

The Chinese tariff heat resulted in a YoY increase of 13% in the loan delinquency rate. According to the Farm Bureau report, “Through June 2019, and over the prior 12 months, there were a total of 535 Chapter 12 bankruptcy filings, up 13%, or 60 bankruptcies.”

China’s trade-related concerns and lower commodity prices have made farmers increasingly cautious about spending on farm equipment. Notably, a strong dollar could weigh on Deere’s fourth-quarter top-line and bottom-line performances. Higher raw material prices could continue to pressure the margins.

Peers feel the trade war pinch too

Deere’s peers are also facing declining revenues and earnings due to the ongoing trade war between the US and China. Last month, Caterpillar (CAT) reported a YoY decline in its third-quarter revenues and profits of 6% and 6.3%, respectively.

AGCO’s (AGCO) third-quarter top-line and bottom-line results fell 4.8% and 9.9%, respectively. CNH Industrial (CNHI) also registered a YoY decline of 11.9% in its third-quarter revenues, while its earnings remain flat YoY.

Why are analysts still bullish on Deere?

Despite expecting dismal fourth-quarter results, analysts are still bullish on Deere stock. The analysts polled by Reuters provided a consensus “buy” rating on the stock. About 57% of the 23 analysts covering Deere stock have a bullish stance. Nearly 39% of the analysts recommend a “hold,” while 4% have a bearish view.

In November, one of the prominent Wall Street analysts upgraded Deere’s rating, while three analysts raised their target prices. On November 10, Melius Research upgraded the stock to “overweight” from “market weight.” In the last two weeks, Citigroup, Deutsche Bank, and UBS raise their target prices 21.2%, 9%, and 12.5%, respectively.

We think that research firms’ rating upgrades and upward target price revisions could be due to positive sentiments about a trade deal between the US and China. According to a Reuters report on October 30, China might remove the tariff on nearly $50 billion worth of US agricultural products. Gradually removing the tariffs would revive the US agricultural industry and spur farmers to invest in farm equipment.