Deere equipment on sale in Texas, the US. Picture: REUTERS/MOHAMMAD KHURSHEED
Deere equipment on sale in Texas, the US. Picture: REUTERS/MOHAMMAD KHURSHEED

Chicago — Deere on Wednesday delivered a more cautious outlook than expected for the year ahead as simmering US-China trade tensions and difficult growing conditions keep North American farmers from replacing large equipment, the company’s top moneymaker. The shares tumbled to a six-week low.

Demand for machinery has taken a back seat as trade concerns have farmers worrying about who will buy their products, while financial-services results have come under pressure due to operating-lease losses. Construction equipment purchases are also set to decline.

Giving his first guidance for fiscal 2020, newly appointed CEO John May projected net income in a range of $2.7bn to $3.1bn. That compares with the $3.46bn average analyst estimate.

The outlook “appears overly conservative”, said Bloomberg Intelligence analyst Chris Ciolino. “It’s a case of a new CEO setting a low bar and taking a very cautious approach given some of the uncertainties facing farmers.”

Shares, which had rallied in the past six months, fell as much as 5.3% to $167.25, the lowest since October 10.

Global sales of agriculture and turf equipment are forecast to fall 5% to 10% for fiscal 2020, driven by lower demand for large equipment in North America. Construction and forestry equipment sales are expected to slide 10% to 15%. Last quarter, Deere announced cost cuts and said it would lower output compared with retail demand to manage growing inventories.

For its fiscal fourth quarter, the top tractor maker reported better-than-expected sales and earnings that were broadly in line with estimates. Adjusted earnings of $2.14 a share compares with $2.30 a year ago and an average analyst estimate of $2.13. Sales rose 4.3% to $8.7bn.

There are positives. A deal between the US and China could provide a stimulus for North American agriculture. Moreover, US government payments, so-called bailout money paid to farmers to compensate for the harm from the trade war, should reach growers in Deere’s first quarter, which could improve demand.

“Farm fundamentals should still be positive, with pent up replacement demand both in North American and South American large agriculture, and significant government payments helping support farm income,” analysts at Jefferies including Stephen Volkmann said in a November 25 report.

May said the longer term outlook remains healthy.

Bloomberg