Morning Note: Market News and good results from Deere

Monday 22nd May 2023

Market News?

US equity markets ended last week on a subdued note as debt ceiling talks paused and company updates disappointed. This morning in Asia, markets were more buoyant after President Biden said relations with China are expected to improve “very shortly”: Nikkei 225 (+0.9%); Hang Seng (+1.7%); Shanghai Composite (+0.4%). However, China ruled that Micron’s chips failed a review and told companies to stop buying them. The US Commerce Dept said Beijing’s conclusion had “no basis in fact.” Samsung Electronics, Hynix and Chinese chip stocks gained.

The FTSE 100 is currently little changed at 7,774. The UK government has disposed of part of its shareholding in NatWest Group by way of an off-market purchase by the company of 469.2m shares at a price of 268.4p. The transaction will raise ￡1.26bn and reduce the government’s holding from 41.4% to 38.6% (worth c. ￡10bn). The Treasury will keep other disposal options under active consideration.

The 10-year Treasury moved up to 3.65%, while UK gilts closed in on 4%. Gold trades at $1,976 an ounce. Sterling buys $1.2415 and €1.1498. The oil price traded lower, with Brent Crude currently $74.70 a barrel. In the global race against inflation, OPEC+ is losing out, Javier Blas writes. The $75-a-barrel oil of 2023 has the same purchasing power as the $55-a-barrel a decade ago. Back then, nominal oil prices were above $100 a barrel.

US debt limit negotiators resumed talks last night after Joe Biden and Kevin McCarthy agreed to have their teams give it another go. A day earlier they broke off contact amid partisan finger-pointing. They plan to meet in person today. Republican Garret Graves said the GOP is insisting on a multi-year spending cap. Janet Yellen said the government will fall short of funds by mid-June, underscoring the urgency in reaching a compromise.

Christine Lagarde doubled down on her hawkish rhetoric, saying the “ECB isn’t pausing based on the information I have today” and that the inflation outlook is “too high and for too long.” But she did say policymakers have covered a large chunk of the journey toward taming prices. In the US, Neel Kashkari said he may support a June pause. That would give the Fed time to assess the effects of past hikes and the inflation outlook, he told the WSJ.

Company News - Deere

On Friday afternoon, Deere & Company released results for the second quarter of its financial year to end-October 2023. Performance was ahead of market expectations and the group raised its full-year guidance. The shares were marked up by 4% in response.

Deere is a global agricultural and construction equipment company with annual sales of almost $53bn. The group has a strong track record of innovation, a comprehensive distribution infrastructure, and a global after-market capability. The group’s strategic aim is to outpace industry growth and generate a mid-cycle operating margin of 15%.

The business is benefitting from broad trends based on population and income growth, especially in developing nations, which are driving agricultural output and infrastructure investment. In addition, technological advances and agricultural mechanisation are expanding existing markets and opening new ones by helping customers increase their productivity, profitability, and sustainability.

The company believes it has incremental addressable market opportunities of more than $150bn that can be targeted through engaging with more customers and increasing levels of connectivity. The focus is on helping customers manage higher costs and increasingly scarce inputs, while improving their yields, using Deere’s integrated technologies.

In the near term, the market environment continues to be supported by positive fundamentals and healthy demand for farm and construction equipment. The group is also benefitting from an improved operating environment, which is contributing to higher levels of production.

In the three months to 30 April, worldwide net sales and revenue grew 30% to $17.4bn, while net sales of equipment operations grew 34% to $16.1bn, above the $14.8bn expected by the market. Net income rose by 36% to $2.86bn, while adjusted diluted EPS increased by 42% to $9.65, well ahead of the $8.59 market forecast.

The Production & Precision Agriculture segment includes large and certain mid-size tractors, combines, cotton pickers, sugarcane harvesters and loaders, and soil preparation, seeding, application and crop care equipment. During the quarter, sales grew by 53% to $7.8bn due to higher shipment volumes and price realisation. Operating profit grew 105% to $2.2bn, as increased revenue more than outweighed the impact of higher production costs. The margin rose from 20.7% to 27.7%.

The Small Agriculture and Turf segment includes certain mid-size and small tractors, as well as hay and forage equipment, riding and commercial lawn equipment, golf course equipment, and utility vehicles. During the quarter, sales grew by 16% to $4.1bn, driven by higher shipment volumes and pricing. Operating profit was up 63% to $849m, as increased revenue also more than outweighed the impact of higher production costs. The margin increased from 14.1% to 14.9%. Construction & Forestry sales grew 23% to $4.1bn, while operating profit grew by 3% to $838m.

The group’s Financial Services division reported adjusted net income down 87% to $28m, mainly due to less-favourable financing spreads and a higher provision for credit losses, partially offset by income earned on higher average portfolio balances. The was also a $135m tax impact.

Deere’s balance sheet is robust, with net debt of c. $52bn, a level consistent with supporting a credit rating that provides access to low cost and readily available funding. The group has a policy to raise its dividend “consistently and moderately”, targeting a 25%-35% payout ratio of mid-cycle earnings. The quarterly payout was increased from $1.20 to $1.25.

The group has enjoyed a good start to the year and is raising its guidance (for the second time) based on positive fundamentals, low machine inventories, and a continuation of solid execution. Net earnings for FY2023 are now expected to be $9.25bn-$9.50bn, versus previous guidance of $8.75bn-$9.25bn.