Following concerning Q2 results from AGCO (AGCO, Financial) and soft construction numbers from Caterpillar (CAT, Financial), Deere's (DE, Financial) relatively weak Q3 (Jul) performance was better than anticipated, triggering a solid move higher today. Deere exceeded earnings and sales estimates, continuing to excel on its bottom line by controlling expenses. However, sales still fell year-over-year. Management noted that agricultural fundamentals remain muted, and demand in Construction & Forestry has tempered, resulting in challenging market conditions.
The sluggish economic environment has prompted Deere to implement further cost-reduction measures and adjust its production schedules for the rest of the year to target lower year-end inventory levels. Deere's actions reflect those of AGCO, which is cutting production to balance dealer inventories, hoping for more balanced demand in 2025. As a result, Deere has a full order book across all segments for the remainder of FY24 (Oct).
- In Q3, all core business lines saw year-over-year sales drops, with the steepest decline in Production & Precision Ag, which fell 25%. Lower shipment volumes were the main cause, partially offset by price realization. The drop in sales led to a 35% year-over-year decrease in operating profits.
- Small Ag & Turf and Construction & Forestry performed moderately better, with revenue declines of 18% and 13%, respectively. However, operating profits and margins in these segments decreased similarly to Production & Precision Ag.
- Small Ag & Turf is struggling due to a lackluster macroeconomic environment. Commodity prices are crucial, and the global rebuilding of grain stocks is problematic as it increases supply and lowers prices. Elevated interest rates and geopolitical uncertainty continue to impact purchase decisions across all end markets.
- In Construction & Forestry, U.S. government spending has provided some relief, but not enough to counter a sequential slowdown in single-family housing starts, compounded by a decline in multi-family housing starts and ongoing issues in the commercial real estate market. Deere's commentary aligns with Caterpillar's, though Caterpillar noted that residential sales to North American customers increased, reflecting healthy demand for new housing.
- Looking ahead, Deere does not expect conditions to improve in the near term. Most of its FY24 growth targets remain unchanged, with some worsening. The company forecasts 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 fall 5-10%, compared to the previous forecast of down 5% to flat. As a result, the overall net sales outlook for this segment has changed to down 10-15% from down 5-10%.
Market conditions remain unfavorable, and there are few signs of improvement soon. However, given recent results and comments from peers, investors are not surprised by this. Instead, they are optimistic about Deere's efforts to align production with demand, which should better position the company to respond effectively once the market recovers.
