Deere guided higher for fiscal 2023 early Friday, after easily topping earnings estimates for its second quarter on healthy equipment demand. DE stock jumped to seize a key level, then reversed lower.
On an earnings call, Deere management indicated that Q2 results benefited from a pull-forward of production from the latter half of 2023.
That led to concerns about a sequential sales decline in the current third quarter, with Q2 marking the year's production peak, analysts said.
Deere may have "to manage inventory levels with lower production, so as to exit the year in good shape given the increasing end market concerns due to lower crop prices," William Blair analyst Lawrence De Maria told IBD in an email.
Tractor maker Deere is seen as a bellwether for the farm economy. It also makes heavy machinery for the construction and forestry markets.
Deere Earnings
Estimates: For the quarter ended April 30, Deere earnings were forecast to grow 26% to $8.58 per share, according to FactSet consensus estimates. Total revenue was seen rising nearly 20% vs. a year earlier to $15.993 billion.
Results: Deere earnings jumped 42% to $9.65 a share, though that's a slowdown from 124% in the first quarter. Revenue swelled 30% to $17.39 billion, above expectations, but still the second straight quarter of slowing sales growth.
Production and precision agriculture sales leapt 53%. Smaller agriculture and turf sales grew 16%. Construction and forestry sales rose 23%.
"Deere continues to benefit from favorable market conditions and an improving operating environment," CEO John May said in the Deere earnings release.
"Though supply-chain constraints continue to present a challenge, we are seeing further improvement," May added.
Outlook: Deere now sees full-year net income of $9.25 billion-$9.50 billion, vs. its prior target of $8.75 billion-$9.25 billion. Analysts had forecast net income of $9.06 billion, FactSet shows.
DE Stock Reverses Lower
Shares of Deere closed down 1.9% to 363.55 on the stock market today, falling back below the 50-day moving average. DE stock had gapped up as much as 6% to 393 in the Friday morning session, clearing the 50-day for the first time since early April.
Deere stock peaked last November and has been trending lower, with the 10-week moving average now below the 40-week line, the MarketSmith chart shows.
Caterpillar, CNH Industrial and United Rentals are also heading lower and below key levels. CAT stock was almost unchanged, at 214.79, Friday. CNHI stock lost 0.1% while URI stock rose 1.3%.
'Prudent' Move On Production
Deere management "is prudently limiting production to ensure inventories at the dealer level remain lean," Edward Jones analyst Matt Arnold told IBD Friday.
That "should set up another solid year in 2024," he added.
The move comes with the outlook for Deere's end markets under scrutiny.
The World Bank projects agricultural commodity prices will drop 7% this year and will likely fall again in 2024, the Texas Farm Bureau said on May 18.
Prices for all types of farm equipment soared in recent years for reasons very similar to those that drove automobile prices to record levels. As supply chain issues and demand begin to balance, lower farm commodity prices could place additional pressure on farm equipment sales.
In April, construction giant Caterpillar gave a lackluster outlook for equipment sales as well. United Rentals, which rents out scissor lifts and a range of heavy equipment, turned in a mixed report the same month.
Year to date, Deere stock is down around 15%. It pays a 1.3% dividend yield.
