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Deere & Co hurt by commodity prices

The company will reveal its second-quarter numbers on Friday 22 May, and trading conditions remain tough.

London Stock Exchange
Source: Bloomberg

The machinery manufacturer had a 43% drop in first-half profits and it has subsequently lowered its full-year forecast. Seeing as agricultural commodity prices have fallen since the last update, Deere & Co will have to muddle on.

Turf and farming machinery account for approximately 70% of the company’s revenue stream, and low soft commodity prices have prompted farmers to trim their capital expenditure plans, and the knock-on effect on the company is evident.

Bumper harvests in the Americas are sending commodity futures lower, and sanctions imposed on Russia have curtailed capital expansion in the country and for many of its neighbours. Within the farming division, the US and Canada account for over 60% of Deere’s earnings, and the US Department of Agriculture has predicted a 32% drop in net farm income this year, and highlights that Deere will have a difficult year ahead.

As I stated previously, Deere has been cutting jobs, and trying to gain a bigger market share of the forestry and construction machinery market. These plans will need to be accelerated to combat falling commodity prices.

When Deere & Co announces its second-quarter numbers, the market is expecting revenue of $7.56 billion and earnings per share (EPS) of 155 cents. The first-quarter numbers were well received, and the revenue was $5.6 billion, and the EPS was 112 cents. The market was anticipating $5.49 billion and EPS of 82 cents respectively. The company will reveal its full-year numbers in November, and the market is expecting revenue of $27.08 billion and EPS of $5.31. These forecasts represent a 17% drop in revenue and a 38% drop in EPS.

Equity analysts are bullish on Deere & Co, and out of the 23 ratings, five are buys, ten are holds, and eight are sells. The average target price is $86.63, which is 2% below the current price. Investment banks also hold a bullish outlook for AGCO Corp, and out of the 18 ratings, two are buys, 11 are holds, and five are sells. The average target price is $47.63, which 7% below the current price.

Deere’s share price has been rising since October, and the $87.50 region is providing support, and the resistance in at $93.40 will be the upside target. If $87.50 is punctured, the next level of support will be in the $84.50 area.

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