Deere's shares hit five-year high on unexpected rise in quarterly profits

CHICAGO (Reuters) – Deere & Co’s (DE.N) shares soared on Friday to their highest level in at least five years after it reported an unexpected increase in first-quarter profit and retained full-year earnings forecast as signs of stabilization in the U.S. farm sector offset weak demand for construction machines.

After gaining 9.7% in the morning trade, the world’s largest farm equipment maker’s shares were last trading up 8.3% at $179.54.

Deere’s earnings in the past quarters were buffeted by a nearly two-year-long U.S.-China trade war that hit U.S. agricultural exports, leaving farmers struggling to turn a profit.

But President Donald Trump’s interim trade deal with China has raised hopes of a recovery in farm machinery demand.

“Farmer confidence, though still subdued, has improved due in part to hopes for a relaxation of trade tensions and higher agricultural exports,” Chief Executive John May said in a statement.

However, there are risks that could upend this optimism.

A little over a month since the U.S.-China trade deal, which mandates a sharp jump in U.S. agricultural exports this year, farm commodity prices remain depressed as Chinese purchases have been way below the pre-trade war levels.

While there were always doubts whether China can boost U.S. farm purchases by the dollar amount agreed to in the interim deal, the coronavirus outbreak has only added to the scepticism.

The world’s second-largest economy is struggling to get its economy back on track following the outbreak, which has so far killed over 2,200 in China and spread globally.

The outbreak not only forced Deere to close all of its eight facilities in China, but is also threatening to affect its factories in the United States by limiting supplies of several components that formerly came from China.

On Friday, the company said limited production has restarted at some of its Chinese facilities. But the outbreak will impact its sales and profits in the second quarter, Deere said.

The company estimates to spend $40 million in the second quarter on expedited freight and is working with its suppliers and logistics providers to alleviate the supply issues.

Illinois-based Morton Industries, which supplies to Deere, Caterpillar (CAT.N) and Komatsu (6301.T), said customers are helping it to procure the impacted components from domestic vendors.

“There is a lot effort going on right now to minimize the impact,” said Kevin Baughman, Morton’s vice president of operations. “We do not anticipate any supply disruptions with our efforts.”

Sales at Deere’s farm and turf business, which accounts for nearly 60% of its revenue, declined in the latest quarter, but higher price realization along with lower production costs and warranty expenses resulted in higher operating profit.

It expects an improvement in market conditions in the United States and Canada – the company’s biggest market – despite forecasts for lower industry sales of farm machines in the region this year.

U.S. farm cash receipts, for example, are projected to be up this year. Prices, as well as the inventory of used equipment, are expected to be stable.

Meanwhile, Deere’s inventory of large farm machines – which account for nearly half of its agricultural equipment revenues – is running below the industry average.

A lower tax rate lifted the quarterly profit to $1.63 per share from $1.54 per share last year, topping Refinitiv’s average analyst estimate of $1.26 per share.

Deere retained its 2020 profit forecast of $2.7 billion to $3.1 billion.

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