Deere Surges on Surprise Profit Growth Spurred by Farm Recovery

Machinery giant Deere & Co. delivered an unexpected increase in earnings and maintained its annual outlook as early signs of stabilization in the U.S. farm sector offset a slowdown in construction. Shares surged.

“Farmer confidence, though still subdued, has improved due in part to hopes for a relaxation of trade tensions and higher agricultural exports,” Chief Executive Officer John May said in astatement accompanying its fiscal first quarter results.

While the CEO didn’t mention the coronavirus in the statement, his comments may help ease concerns about how much the outbreak will delay China’s return to U.S. agricultural markets as laid out in the phase one trade deal. The tit-for-tat tariff spat with China made American farmers cautious on replacing large equipment, Deere’s top moneymaker.

Shares, down 4.3% this year, rose as much as 10% before the start of regular trading Friday. Investors will be looking for more detail on the company’s prospects for this year in light of coronavirus on a conference call scheduled for 10 a.m. in New York.

Deere maintained its fiscal 2020 guidance, forecasting a range of $2.7 billion to $3.1 billion. That compares with the $2.9 billion average analyst estimate.

The company’s cautiously optimistic view on agriculture contrasts with the results of a survey released Thursday in which more than half of U.S. farmers said they planned to spend less on capital equipment this year. Fundamentals for American farming remain challenged with increasing competition from South America and the Black Sea region compounded by a strong dollar. Two of Deere’s peers issueddisappointing 2020 outlooks.

As Deere reduces production to work through excess inventory and faces weaker demand, Bloomberg Intelligence expects a slow start to fiscal 2020.

Precision Ag

“The Coronavirus has driven investors to a defensive positioning in machinery and Deere has been the defensive play,” Stephens analyst Ashish Gupta said in a Feb. 18 report. “The long-term thesis centers around Deere coming out the farm machinery winner due to investments in precision ag and we do not think an F1Q results shortfall is likely to change that.”

Deere said it is proceeding with measures to create a more focused organizational structure that can operate with greater speed and agility.

The company reported adjusted earnings of $1.63 a share for the quarter, up from $1.54 a year ago. The average analyst estimate was $1.25. The result was helped by a tax benefit. Sales fell 6%, dragged down by lower construction and forestry shipment volume and unfavorable currency effects.

“We expect a positive stock reaction as we think full-year EPS estimates are likely to move higher,” Citigroup Inc. analysts said.

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