Morning Note: Market news and updates from Deere and Walmart.

Market News

Federal Reserve officials have suggested they’re not in a rush to cut interest rates. Loretta Mester said holding a “restrictive stance for longer is prudent at this point.” Thomas Barkin said it will take more time to bring down inflation. Raphael Bostic reiterated the need for patience. The 10-year Treasury yield edged up to 4.38%, while gold trades at $2,385 an ounce. US equity markets drifted lower in response last night – S&P 500 (-0.2%), Nasdaq (-0.3%).

This morning in Asia, markets were mixed: Nikkei 225 (-0.3%); Hang Seng (+1.1%); Shanghai Composite (+1.1%). In China, consumer spending growth surprisingly slowed in April to +2.3% (vs. +3.7% expected), while industrial output grew by 6.7%, ahead of the 5.5% forecast. Home prices fell, much faster than in the previous month, by 58bps. The floor on mortgage rates was removed and the minimum down payment ratios were lowered for individual homebuyers in its most drastic move to shore up the beleaguered property market.

The FTSE 100 is currently little changed at 8,436, while Sterling trades at $1.2660 and €1.1658. The oil price steadied at $83.40 a barrel.

Source: Bloomberg

Company News

Yesterday lunchtime, Deere & Company released results for the three months to 28 April 2024, the second quarter of its financial year to end-October 2024. Although earnings were slightly ahead of market expectations, the group cited moderating activity as agricultural fundamentals normalise. For the second time this year, the group has cut its guidance for FY2024. In response, the shares were marked down by 3% in US trading hours.

Deere is a global agricultural and construction equipment company with annual sales of more than $61bn. The group has a strong track record of innovation, a comprehensive distribution infrastructure, and 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.

However, in the near term, the market environment has deteriorated due to higher interest rates, squeezed budgets, and falling crop prices. As a result, fleet replenishment is moderating. Overall, global agricultural and turf demand has softened further, while the construction industry has remained stable.

During the latest quarter, worldwide net sales and revenue fell by 12% to $15.24bn, while net sales of equipment were down by 15% to $13.61bn, slightly better than the market expectation of $13.28bn. Net income fell by 17% to $2.37bn, while EPS fell 12% to $8.53, slightly better than the market forecast of $7.86.

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 fell by 16% to $6.58bn due to lower shipment volumes partially offset by price realisation. Operating profit slumped by 24% to $1,650m, mainly due to lower volumes and higher production costs. The margin slipped from 27.7% to 25.1%.

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 final quarter, sales fell by 23% to $3.2bn, with lower shipment volumes partly offset by higher pricing. Operating profit was down 33% to $571m, with the margin falling from 20.5% to 17.9%. Construction & Forestry sales fell by 7% to $3.8bn, while operating profit fell 20% to $668m.

The group’s Financial Services division reported adjusted net income up from $28m to $162m, due to income earned on higher average portfolio balances, partially offset by a higher provision for credit losses and less-favourable financing spreads.

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 latest quarterly dividend was raised by 22% to $1.47 per share. 

Looking forward, the group expects fleet replenishment to moderate as agricultural fundamentals normalise from record levels in 2022 and 2023 due to high borrowing rates and falling crop prices. Net sales are now expected to decline in FY2024 by 20%-25% in Production & Precision Agriculture (versus a 20% decline forecast previously), 20%-25% in Small Agriculture and Turf (vs. down 10%-15% previously), and 5%-10% in Construction & Forestry.

The group is proactively managing its production and inventory levels to adapt to demand changes and position the business for the future. Against that backdrop, earnings are now forecast to be around $7.0bn (vs. $7.50bn to $7.75bn previously).

Source: Bloomberg

Yesterday lunchtime, Walmart released results for the first quarter of its financial year to end January 2025 that were ahead of market expectations. Despite the early stage in the year, the company raised its full-year guidance, and in response, the shares climbed by 7%.

Walmart operates more than 10,500 stores and numerous e-ecommerce websites under 46 banners in 19 countries. In the face of strong competition, the group’s strategy is ‘to lead on price, invest to differentiate on access, be competitive on assortment, and deliver a great experience’. The company’s sales are massive – $648bn in the last financial year. Back in February, the company undertook a 1 for 3 stock split.

In the 13 weeks to 30 April, consolidated revenue increased by 5.8% on a constant currency basis to $161.5bn, ahead of the guidance provided by the company of 4%-5%. The quarter benefitted to the tune of 1% from an additional leap year selling day.

In the US, comparable sales increased by 3.8% (ex-fuel) to $108.7bn. Growth was made up of a 3.8% increase in transactions (i.e., volume) and an unchanged average ticket (i.e., price). E-Commerce sales grew 21%, led by store fulfilled pickup & delivery and marketplace. The group’s value-convenience proposition is resonating with consumers, while share gains were primarily driven by upper-income households.

Sam’s Club, the trade business, generated revenue of $18.7bn, up 4.4% in comparable terms (ex-fuel).

Outside of the US, the international business grew by 10.7% at constant currency to $29.4bn, driven by China and Mexico. eCommerce sales rose by 19%, with penetration up across markets. The global advertising business grew by 24%, led by Walmart Connect in the US (+26%).

Gross margin rose by 42 basis points to 24.1%, driven by improvements across segments, led by Walmart US. The group kept a tight rein on costs – adjusted operating expenses as a percentage of net sales only grew by 24 basis points, driven by higher variable pay expenses due to exceeding planned performance and increased associate pay including previously-announced wage investments. Adjusted EPS rose by 22.4% to $0.60, above the group’s guidance of $0.49-$0.52 once the impact of a net gain on equity and other investments (5c) and business reorganization charges (2c).

There was a free cash outflow of $0.4bn, while net debt ended the quarter at $40.7bn. Global inventory was down by 2.7% to $55.4bn, including a decrease of 4.2% for Walmart US. The company highlights that in-stock levels are ‘healthy’. Excess cash is returned to shareholders through dividends and buybacks. During the quarter, the group bought back $1.1bn of its shares, leaving $15.5bn of its $20bn repurchase authorisation.  The company also paid out $1.7bn in dividends.

The company now expects to be at the high end or slightly above its previous guidance for the financial year to January 2024: consolidated net sales growth (3.0%-4.0%) at constant currency, operating income growth of 4.0%-6.0%, and adjusted EPS of $2.23-$2.37. In the current quarter, the group expects net sales to increase by 3.5%-4.5% and operating income to grow by 3.0%-4.5%, in constant currency. EPS is forecast to be $0.62-$0.65.

Source: Bloomberg