In Spite of Lowered Expectations, Deere's Stock Climbs After Strong Earnings

Deere & Co.'s stock experienced a notable surge, climbing 4% on Thursday after the agricultural and construction machinery manufacturer exceeded lowered earnings expectations for its fiscal third quarter and reaffirmed its full-year profit outlook.

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This positive movement in Deere's stock comes after a series of challenges earlier in the year. The company had previously adjusted its guidance for fiscal 2024 in May, which led to a reduction in analysts' estimates. Additionally, Deere announced plans to cut an unspecified number of jobs to better align its production with market demand. Despite these adjustments, the company's recent earnings report provided a much-needed boost to investor confidence.

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According to Dow Jones Market Data, this rise marked the stock’s most significant one-day gain in over a year, with the last comparable increase occurring on December 23, 2023, when it closed up by 4.9%.

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Deere, headquartered in Moline, Illinois, reported a net income of $1.734 billion, or $6.29 per share, for the quarter ending July 28. This represents a significant decline from the $2.978 billion, or $10.20 per share, recorded during the same period the previous year. Additionally, the company saw a 17% drop in sales, which totaled $13.152 billion for the quarter.

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Despite these declines, Deere's performance still managed to surpass the expectations set by analysts. The consensus forecast by FactSet was for earnings per share (EPS) of $5.68 and sales of $10.935 billion, both of which Deere exceeded.

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In his prepared remarks, Chief Executive John C. May emphasized the company's strong execution despite facing tough conditions in both the global agricultural and construction sectors. He noted that the third-quarter results demonstrate Deere's ability to navigate these challenges effectively.

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During the quarter, Deere incurred $124 million in charges related to employee separation programs across several regions, including the U.S., Europe, Asia, and Latin America. The majority of these separations were involuntary. While the company did not specify the number of layoffs, it anticipates the total pretax cost of these programs will reach $150 million, with expected savings of approximately $230 million, $100 million of which is projected to be realized in 2024.

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May acknowledged the difficulty of these decisions but underscored their importance for the company’s long-term success and competitiveness.

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Breaking down the performance by segment, Deere reported that its production and precision agriculture sales fell by 25% to $5.099 billion, primarily due to lower shipment volumes. Similarly, sales in the small agriculture and turf segment decreased by 18% to $3.053 billion, also driven by reduced shipment volumes. The construction and forestry segment saw a 13% decline in sales, bringing in $3.235 billion for the quarter.

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Looking ahead, Deere maintained its projection for fiscal 2024 net income to be around $7.0 billion, which aligns closely with the FactSet consensus estimate of $6.958 billion. However, the company revised its free cash flow guidance downward, now expecting it to range between $6.0 billion and $6.5 billion, compared to the previous forecast of $7.0 billion to $7.25 billion.

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By segment, Deere anticipates that sales in both the production and precision agriculture and small agriculture and turf segments will decline by 20% to 25% for the year. Meanwhile, sales in the construction and forestry segment are expected to decrease by 10% to 15%.

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Analysts from D.A. Davidson noted that investors had likely braced for worse results, and the actual figures were somewhat of a relief. Analysts Michael Shlisky and Linda Umwali pointed out that Deere’s revenue in the production and precision agriculture segment exceeded their estimates by 15%, while the small agriculture and turf segment surpassed expectations by about 9%.

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As investors now turn their attention to the company’s fiscal 2025 outlook, which begins on November 1, Shlisky and Umwali suggested that Deere’s major adjustments likely occurred in the previous quarter, reducing the need for further significant changes.

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Despite the recent uptick, Deere's stock remains down 8% year-to-date, underperforming the S&P 500, which has gained 15.7% over the same period.

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