·John Deere, maker of machines used in earth moving, road building and timber harvesting, reported an earnings beat in the fiscal third-quarter and provided guidance for higher profits for the full-year 2021. At the same time, the company also warned that rising costs and supply chain constraints would intensify going into next year.
· Revenue in the period swelled 29% to $11.53 billion and earnings surged 107% to $5.32 a share. All categories, including agriculture, turf and construction, contributed to the rebound in the results year-over-year despite continuing supply chain issues for things like semiconductor chips. The company has invested heavily in automation, the Internet of Things (IoT), artificial intelligence (AI) and autonomous driving software for its increasingly tech-laden tractors, combines and bulldozers – with famed technology investor Cathie Wood even referring to John Deere as a tech company now.
Divisionally, farm and lawn sales rose 29% and 32% respectively, whilst construction sales surged 38% as the businesses were aided by higher machinery prices passed onto consumers. John Deere said price hikes are likely to continue in an effort to offset rising costs for the full year. Despite this, the agricultural business is expected to benefit from strong replacement demand due to aging fleets. Currently, according to Bloomberg Intelligence, the world’s farm-equipment fleet is the oldest it’s been in more than two decades. This means that low inventories and extended order books could underpin a potential multiyear recovery for John Deere’s agricultural equipment segment.
The construction business is poised to benefit from the planned $1 trillion infrastructure bill, which the US Senate has already passed, to rebuild America's roads, bridges, airports and waterways. The tractor maker also continues to be a beneficiary of soaring agricultural commodity prices, with crops such as corn, soybeans, wheat and even coffee advancing to multiyear highs on the back of increasing global demand as economies begin recovering from the pandemic as well as from supply problems exacerbated by inclement weather in key production regions.
The company does however face a number of headwinds too. Domestic steel prices have gained around 90% in 2021 alone as demand jumped for everything from automobiles to washing machines (and combine harvesters). One of John Deere’s competitors AGCO Corporation warned investors last month that the jump in steel prices had begun to impact demand from farmers. In the US, a tightening labour market, which has been tough for most businesses to navigate, means higher wage costs too. Grain prices have also begun to ease after making the multiyear highs mentioned earlier, which means lower profits (and therefore incentive) for farmers to reinvest into equipment replacement. Additionally, China's growth appears to be slowing, although John Deere appears to have less exposure to that country than say Caterpillar.
Despite this John Deere’s outlook remains positive though. It is projecting full-year income of $5.7 billion-$5.9 billion, which is up from the $5.3 billion-$5.7 billion it had estimated in May. It’s also seeing improving prospects in Europe and Asia, where the company said agricultural and turf sales will be more than previously expected. John Deere didn’t change its outlook for the US and Canada, expecting a rise in sales of about 25% for large agricultural equipment, with South America tractors and combines up about 20%. Forecasts for global forestry sales were lowered to 15% from a prior range of between 15% and 20%.
John Deere is an iconic brand and is pivoting well to the changing needs of the industry. The agriculture IoT market is estimated to grow at a CAGR of 9.8% from $11.4 billion in 2021 to $18.1 billion by 2026 and John Deere is set to benefit. This is as farmers and growers increasingly focus on livestock and aquaculture monitoring, disease detection, and feed optimization devices used for precision farming practices in order to formulate data-driven strategies to maximize profits. The company is trading on a PE of around 20x which isn’t onerous relative to the US machinery industry average of 30.7x but is more expensive than the US market overall (17.1x). We do not own the stock but continue to monitor it for opportunities.