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Earns John Deere

People work at the John Deere Commercial Products factory in Grovetown, Ga. Deere & Co. in this file photo.

On Wednesday, John Deere announced its 2018 fourth quarter financial earnings. The results were a bit mixed.

In the fourth quarter, Deere reported net income of $785 million – a 54 percent increase from the fourth quarter of 2017. Net sales and revenues were reported at $9.416 billion – up 17 percent from the fourth quarter of 2017. Furthermore, Deere managed to meet its 2018 full-year profit target of $2.36 billion.

For much of the past year, Deere has struggled to meet its earnings expectations. In the fourth quarter, Deere reported an earnings per share of $2.30, well below the market’s estimate of $2.44. This was the third consecutive quarter that Deere’s earnings missed expectations.

Deere’s stock continues to frustrate investors. After Wednesday’s earnings report, its stock rallied $3.36 to close at $141.88. However, Deere’s stock is still down 9.3 percent for the year and down a sizable 17.3 percent from its 2018 high of $171.49 set back on Jan. 26.

At closer look, there are a number of common themes in Deere’s last three quarterly earnings. On the positive side, for the past three quarters, Deere’s net income has averaged a nearly 50 percent growth rate over the prior year. In fact, in the second quarter, Deere’s quarterly income of $1.208 billion was the highest quarterly profit in the company’s history. Deere has also experienced a strong and consistent global and domestic demand for its goods and services – specifically, for its core agricultural and construction equipment products.

Unfortunately, during these past three quarters, Deere has faced increasingly higher operating and manufacturing costs. Rising inflation, Federal Reserve interest rate hikes and U.S. tariffs (taxes) on imported goods have all driven costs higher. The main challenge has been the rising cost of raw materials, primarily steel. In March, President Trump imposed a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum. To offset these higher costs, Deere has implemented an agenda of cost-cutting and consumer price increases.

Deere’s 2019 outlook also raises some significant concerns. In 2018, its net sales and revenues grew by a robust 26 percent. Next year, sales and revenues are expected to grow by just 7 percent. Furthermore, Deere must try to manage its rising cost structure with the potential escalation of the U.S.-China trade dispute.

America’s 25 percent tariff on imported steel remains a significant hurdle but Deere suggests that higher steel prices had a much bigger impact in 2018 than it projects for next year. Deere must also contend with the more than $250 billion of other Chinese imported goods that Trump has imposed varying tariffs on. For these imported goods, Deere expects an estimated $100-$125 million in higher costs for 2019.

As Deere wraps up its 2018 fiscal year, it has done a commendable job given its current environment. Remember, Deere is a manufacturing company with significant ties to the U.S. farming industry – two key targets for our adversaries in our global trade disputes. Add in the risk factors of rising inflation, interest rate hikes and a weakening global economy, one gains a much clearer picture of the challenges Deere is currently facing.

Yes, for the third consecutive quarter Deere missed its earnings per share target. But all things considered, for investors of Deere stock, Deere’s landscape could have been a whole lot worse.

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Mark Grywacheski spent more than 14 years as a professional trader in Chicago, where he served on various committees for multiple global financial exchanges and as an industry Arbitrator for more than a decade. He is an expert in financial markets and economic analysis and is an investment advisor with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment advisor with the U.S. Securities Exchange Commission.