Market news and results from Deere.
Market News
Chinese banks made a smaller-than-expected cut to their benchmark lending rate and avoided trimming the reference rate for mortgages. The one-year loan prime rate was lowered by 10 bps to 3.45%, while the five-year rate was unexpectedly kept at 4.2%, a move described as “puzzling” after larger cuts by the PBOC. Over the weekend, the central bank again told lenders to support the flagging economy with increased lending and urged adjustment and policy optimisation for home mortgages. Beijing also plans to allow local governments to sell 1.5tn yuan ($206bn) of special bonds to help 12 regions repay debt, Caixin reported. This morning in Asia, equity markets struggled for direction with Japan higher (+0.4%) but mainland China (-1.2%) and Hong Kong (-1.6%) lower.
The focus this week is the Fed’s Jackson Hole event. Confidence is growing that the Fed will achieve a soft landing for the US economy, according to a NABE poll, with nearly 70% of economists at least somewhat optimistic inflation can come down to the 2% target without spurring a recession. The 10-year Treasury currently yields 4.30%. At the open this afternoon, the S&P is currently expected to open a touch higher. The FTSE 100 is currently trading % er at 7,292. Sterling $1.2741 and €1.1703, while gold has drifted to $1,889 an ounce. Brent Crude trades at $85.12 a barrel, while European natural gas prices jumped as Australian LNG workers prepare to strike.
UK property sellers cut asking prices by 1.9% this month, the sharpest decline since December, Rightmove said. Meanwhile, customers are once again locking in gas and power rates amid a decline in wholesale prices, a further sign that the cost-of-living crisis is easing.
From the financial crisis to Russia’s invasion of Ukraine, Britain has borrowed and spent its way out of every jam, with the bill becoming a worry in its own right. Public Debt now exceeds GDP for the first time since 1961, having soared by more than 40% since the pandemic to almost £2.6tn. And a heavy reliance on index-linked bonds means the UK will pay more to service liabilities than any other advanced economy.
Source: Bloomberg
Company News
On Friday afternoon, Deere & Company released results for the third quarter of its financial year to end-October 2023. Profitability was ahead of market expectations and the group raised its full-year guidance. However, the shares were marked down by 4% due to concerns about a potential inventory overhang.
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 and stabilising conditions in the supply chain.
In the three months to 31 July, worldwide net sales and revenue grew 12% to $15.8bn, while net sales of equipment operations grew 10% to $14.3bn, in line with market expectations. Net income rose by 58% to $2,978m, while adjusted diluted EPS increased from $6.16 to $10.20, well ahead of the $8.20 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 12% to $6.8bn due to higher price realisation. Operating profit grew 38% to $1,782m, as increased revenue more than outweighed the rate of increase in production costs. The margin rose from 21.2% to 26.2%.
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 3% to $3.7bn, with higher pricing partly offset by lower shipment volumes. Operating profit was up 33% to $732m, as increased revenue also more than outweighed the impact of higher production costs. The margin increased from 15.2% to 19.6%. Construction & Forestry sales grew 14% to $3.7bn, while operating profit grew by 39% to $716m.
The group’s Financial Services division reported adjusted net income up 3% to $216m, as income earned on a higher average portfolio was partially offset by less favourable financing spreads.
Deere’s balance sheet is robust, with net debt of c. $54bn, 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 payout was increased in the latest quarter from $1.13 to $1.25.
Industry fundamentals are expected to continue fuelling solid demand for the group’s equipment, supported by a strong advance-order position. In response, the group has once again raised its full-year guidance. Net earnings for FY2023 are now expected to be $9.75bn-$10.00bn, versus previous guidance of $9.25bn-$9.50bn.
Source: Bloomberg