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Deere sales hold up better than expected

Sales and profit fell in the three months through April, but agriculture proving more resilient than other industries.

By Elizabeth Rembert and Lydia Mulvany

Deere & Co. shares rose after the top tractor maker navigated pandemic upheavals better than expected and surprised analysts by reinstating earnings guidance.

While sales and profit fell in the three months through April, the drop was less severe than analysts estimated as agriculture -- deemed essential in the lockdown era -- proves more resilient than many other industries.

Lower costs helped defend margins in a quarter that’s often Deere’s strongest as farmers buy planting equipment for the growing season. Even though supply-chain disruptions are weighing on its customers and the China trade deal is a wild card, Deere reported better pricing for its products through the quarter.

The company, which dropped annual guidance in March as it cut back operations amid the virus uncertainties, bucked an industry trend by providing a new forecast -- of $1.6 billion to $2 billion compared with the average estimate of $2.1 billion.

That would be a sharp drop from a year ago but the decision to reinstate guidance is positive, and may prove to be conservative given the solid quarter, said Chris Ciolino, an analyst with Bloomberg Intelligence. Results showed “really just strong execution on the cost side and better pricing.”

Shares were up 1% at 9:43 a.m. in New York ahead of a 10 a.m. earnings call.

The cycle of farmers replacing aging farm machinery will persevere through near-term challenges like the trade war, tough growing conditions and the economic shutdown, according to Edward Jones analyst Matt Arnold.

There are still supply chain issues, though not enough to derail sales and operations. Responding to customer demand “has been a challenge” due to “barriers,” the company said in a statement, noting the pandemic uncertainties could hurt its results and financial position in the future.

Defensive Play

The Moline, Illinois-based company is also shoring up its liquidity. It raised $4.5 billion in funding during the pandemic.

“Deere’s solid balance sheet, good credit metrics and management prudence are likely to help soften the impact of the virus outbreak, at least in the near term,” said Stephane Kovatchev, a credit analyst with Bloomberg Intelligence.

Deere forecast its 2020 worldwide agriculture equipment sales to be down 10% to 15%, and said industry sales would decline 10% in the U.S. and Canada -- its biggest money-making region. It said construction and forestry equipment sales would drop 30% to 40%.

Fiscal second-quarter adjusted earnings were $2.11 cents a share. compared with the $1.62 average estimate and $3.52 a year ago.

To contact the reporters on this story:
Elizabeth Rembert in New York at erembert@bloomberg.net;
Lydia Mulvany in Chicago at lmulvany2@bloomberg.net
To contact the editor responsible for this story:
James Attwood at jattwood3@bloomberg.net
© 2020 Bloomberg L.P.
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