Reporting its financial results for its fiscal second quarter 2022 Friday, Deere said its net sales and revenue came in at $13.4 billion, up 11% year-over-year. Earnings, however, rose 20% year-over-year, to $6.81 per share, exceeding sales growth thanks to a net profit margin that grew by nearly a full percentage point.
Regardless, investors sold off Deere in droves. In just the first two hours of trading Friday, Deere stock fell 11.5%.
Planting seeds, harvesting profits
Given the current macroeconomic environment (i.e. a war in the “breadbasket of Europe” that has decimated grain exports to the developing world, and driven fertilizer prices through the roof), it will surprise no one to learn that Deere’s industrial-scale farming division (“production and precision agriculture”) was the sales driver this past quarter. Sales in this, Deere’s biggest business segment, surged 13% year-over-year, offsetting slower growth in construction and forestry (sales up 9%) and especially in consumer-focused small agriculture and turf segment (sales up 5%).
What’s more, Deere predicts these dynamics will gain strength all year long (if not longer). Giving new guidance for the rest of fiscal 2022, Deere expects end up growing Large Ag sales by 25% to 30% this year, and to grow both construction and Small Ag sales as much as 15% each.
Management further predicted that its earnings this year will range from $7 billion to $7.4 billion. Spread out across approximately 307 million shares outstanding, that works out to $23.45 per share at the midpoint of the guidance range, and implies that Deere stock is selling for about 13.8 times current-year earnings. It also implies that Deere will soundly thump analyst projections for it to earn only $22.70 per share this year. So…why are investors dumping Deere stock in response to this good news?
That’s really hard to say. By all accounts, Deere is driving toward its most successful and profitable year ever. With demand high and rising, farmers likely to be flush on grain profits and well-able to afford new farm equipment, Deere beat earnings in Q2, and is promising to keep on beating earnings all year long.
Granted, at 13.8 times earnings, Deere looks a little bit expensive based on its projected 15% long-term growth rate and tiny 1.2% dividend yield. Still, on balance the earnings news looks good to me — and a better reason to buy Deere stock than to sell it.