Following worrying Q2 results from AGCO (AGCO, Financials) and weak construction numbers from Caterpillar (CAT, Financials), Deere’s (DE, Financials) relatively weak Q3 (July) performance was better than expected, sparking a solid uptrend today. Deere beat earnings and revenue estimates and continued to deliver excellent bottom line performance through cost control. However, revenue declined year-over-year. Management noted that agricultural fundamentals remain subdued and demand in the construction and forestry sectors has slowed, creating challenging market conditions.
The sluggish economic environment has prompted Deere to implement further cost-cutting measures and adjust its production plans for the remainder of the year to target lower year-end inventories. Deere’s actions are in line with those of AGCO, which is reducing production to balance dealer inventories and hopes for more balanced demand in 2025. As a result, Deere has full order books in all segments for the remainder of fiscal year 2024 (October).
- In the third quarter, all core business areas reported year-over-year revenue declines. The largest decline was in Production & Precision Ag, where the decline was 25%. The main cause was lower shipment volumes, partially offset by price reductions. The revenue decline resulted in a 35% year-over-year decline in operating profit.
- Small Ag & Turf and Construction & Forestry fared slightly better, with sales declines of 18% and 13%, respectively. However, operating profits and margins in these segments declined similarly to Production & Precision Ag.
- Small agribusinesses and turf operations are struggling due to a lackluster macroeconomic environment. Commodity prices are critical, and the global restocking of grain stocks is problematic as it increases supply and lowers prices. Elevated interest rates and geopolitical uncertainty continue to influence purchasing decisions across all end markets.
- In the construction and forestry sectors, U.S. government spending has provided some relief, but not enough to offset the sequential decline in single-family housing starts, which was exacerbated by a decline in multifamily housing starts and ongoing problems in the commercial real estate market. Deere’s comment echoes Caterpillar’s, although Caterpillar noted that residential sales to North American customers have increased, reflecting healthy demand for new homes.
- Looking ahead, Deere does not expect conditions to improve in the near term. Most of its growth targets for fiscal 2024 remain unchanged, with some even worsening. The company is forecasting the same year-over-year declines of 20-25% in Production & Precision Ag and Small Ag & Turf. Conversely, Deere expects construction equipment in the U.S. and Canada to decline by 5-10%, compared to the previous forecast of negative 5% to flat. As a result, the overall forecast for net sales in this segment has changed from negative 5-10% to negative 10-15%.
Market conditions remain unfavorable, with little sign of improvement anytime soon. However, given recent results and comments from competitors, investors are not surprised. In fact, they are optimistic about Deere’s efforts to match production to demand, which should put the company in a better position to respond effectively once the market recovers.
