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November 27, 2019 10:15 AM, EST

Deere Shares Fall; New CEO Adopts Cautious Outlook

John Deere equipmentNati Harnik/AP

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Deere & Co. delivered a more cautious outlook than expected for the year ahead as simmering U.S.-China trade tensions and difficult growing conditions keep North American farmers from replacing large equipment, the company’s top moneymaker. Shares fell.

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

John May

May

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

The outlook “appears overly conservative,” Bloomberg analyst Chris Ciolino said. “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 4.9% before the start of regular trading Nov. 27.

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 anticipated 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 $8.7 billion.

There are positives. A deal between the U.S. and China could provide a stimulus for North American agriculture. Moreover, U.S. 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 Nov. 25 report.

CEO May said the longer-term outlook remains healthy.

With assistance from Michael Hirtzer.

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