Deere (DE) Running Lower After Missing Earnings Expectations As Supply Chain Issues Crop Up Again
4:11 pm Friday, August 19th, 2022
Ahead of Deere’s (DE) Q3 earnings report, shares were plowing higher, rallying by 25% since mid-July in a reflection of budding optimism regarding its business prospects. That positive sentiment was bolstered by solid earnings beats from competitors Caterpillar (CAT) and AGCO (AGCO) a few weeks ago. While both companies struggled with lingering supply chain constraints, strong demand for equipment supported their price increases, mitigating the impact from lower sales volumes. A similar scenario was anticipated to play out for DE, but the company badly missed EPS expectations and lowered the midpoint of its FY22 net income outlook.
As expected, the same supply chain issues that inhibited CAT’s and AGCO’s ability to meet demand also hindered DE’s results. However, DE’s revenue growth of 24.8% easily outpaced the 10.5% and 2.3% growth for CAT and AGCO in their most recent quarters. It’s worth pointing out that both DE and CAT lapped growth of 29% in the year-earlier period, so DE didn’t benefit from an easier comp. The same can’t be said for AGCO, which generated an increase of 44% last year, but it’s evident that the demand environment for DE is quite healthy relative to its peers.
The question, then, is this: Why did DE fall considerably short of EPS estimates if sales were so strong?
Construction & Forestry experienced a 30 bps improvement to 15.7%; as the company’s smallest business, the modest bump had little impact.
Total expenses jumped by 23% to $11.6 bln, as compared to a 7% increase in AGCO’s operating expenses. While inflationary pressures afflicted both companies, foreign exchange headwinds due to a stronger dollar are having an outsized effect on DE’s expense line.
The unfavorable impact from foreign exchange also played a roll in DE cutting its FY22 net income guidance to $7.0-$7.2 bln from $7.0-$7.4 bln.
On the positive side, DE CEO John May stated that demand is still strong, and that early-order programs are encouraging as farming fundamentals remain healthy. If the company has success in streamlining its supply chain, then it should be poised for improved earnings performance, especially if input costs continue to ease.
