Deere & Co. (DE) Earnings Preview: Trade War and Tractors

Deere & Company DE closed up a slight 0.08% Tuesday; shares were likely positively affected after the Trump administration pushed back a new wave of tariffs from September to December 15, raising hopes of a trade deal. However, DE stock is down 3.4% YTD, underperforming the farm machinery industry’s zero gain. Investors are looking to farmers and the trade war for hints on future sales.

Overview

Deere & Company is an American heavy machinery manufacturer that has been in business for 182 years. It manufactures agricultural, forestry, construction, and lawn care equipment under the brand name John Deere. Deere faces competition from several domestic and international companies such as American Caterpillar CAT, Japanese Kubota KUBTY, and Dutch CNH Industrial CNHI.

In June, Chinese imports of American goods fell 31% over 2018, with agricultural products among the hardest hit. Despite slowing demand for farm products, Deere performed very well last quarter, setting record quarterly revenues of $11.3 billion. This is up 5.8% from a year previously and up 42.1% from the previous quarter.

In May of 2018, Deere partnered with Hello Tractor and the Nigerian government to provide cheap access to mechanization for farmers in Nigeria. This deal uses Hello Tractor’s platform to allow owners to rent out their tractors to others to defray costs and allow farmers who cannot afford a tractor to use one for the few days per year it is needed. This deal is also beneficial to Deere as it involves the purchase of 10,000 tractors over the course of 5 years and the placement of an assembly facility in Nigeria.

Trade War

The raging trade war between the U.S. and China has impacted many industries, but agriculture has been hit hard. As of August 5^th, China has officially stopped buying U.S. agricultural products in response to additional 10% tariffs placed on $300 billion worth of Chinese goods. This hurts the farmers’ profits as demand falls. However, prices for corn, the U.S.’s second largest agricultural product by cash receipt, have risen 12.2% in the past 3 months, benefiting some farmers.

Due to lowered demand for farm products, farmers have not been making as much revenue in recent months. As a result, they are less likely to spend on large capital investment items like new tractors or combines. Multiple Deere dealers across the farm belt have been reporting that sales are down for the first half of 2019 by between 15% and 50%. In addition to pressures put on farmers by the trade war, many farmers were hurt this year due to an extremely wet spring. This left large swaths of the farm belt needing to delay planting or not being able to plant at all.

During Deere’s Q2 earnings report, the company lowered full year 2019 guidance as one would expect. Executives cited “softening conditions in the agricultural sector” saying that field inventories would have to be managed as demand dropped significantly. However, executives did state a strong long-term forecast and did not change guidance past 2019. Deere is not alone in this as many companies have taken top line hits, especially those highly exposed to Chinese buying, such as 3M MMM, Ford F, and Apple AAPL.

Outlook

Revenue for this quarter and next are estimated to hold roughly in line to a year ago, with less than a 1% change predicted in each quarter. Full year 2019 estimates show 4.6% growth over 2018, a positive sign considering the magnitude of headwinds affecting the industry. Fiscal 2020 revenue growth is projected at 4.43%, showing an expectation of consistent growth.

Earnings estimates look even better than revenue projections, showing an expected increase in gross margins. Current quarter earnings are estimated to jump 8.5% over a year ago to $2.81 per share. Next quarter earnings are estimated to grow a modest 1.74% over a year ago, jumping 8.84% to $10.22. 2020 earnings are projected to grow significantly to $11.78, a 15.34% increase.

Bottom Line

Deere & Company currently holds a Zacks Rank #3 (Hold), as estimates have been dropping slightly likely due to the trade war. Investors are likely worried about trade war implications for a company so exposed to a hurting U.S. agricultural industry. But revenue and earnings estimates show that Deere will likely be able to weather the storm with little to no shrinkage. However, the longer the trade war drags on, the more at-risk Deere will be to drastically reduced sales.

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