On Friday, JPMorgan (NYSE:JPM) reiterated its Neutral rating on Deere & Company (NYSE:DE) with a steady price target of $360.00, following an analysis update of the company's Financial Services (FS) division after its recent quarterly filings. The report highlighted a mixed performance in the third fiscal quarter of 2024 (F3Q24), where Deere's FS revenue saw a 15% year-over-year increase to $1.7 billion. This growth was attributed to an expansion in average receivables and leases financed, coupled with higher average financing rates.
Despite the revenue uptick, net income for the FS segment dropped by 30% year-over-year, with the margin decreasing by approximately 580 basis points to 9.1%. The decline in net income was due to less favorable financing spreads, a consequence of rising interest rates and a higher provision for credit losses, which overshadowed the income gained from higher average portfolio balances.
The provision for credit losses under the John Deere Capital Corporation (JDCC) surged to $122.4 million, representing 9.5% of the revenue for F3Q24. This figure is a significant jump compared to $22.4 million, or 2.1% of revenue, in the same quarter of the previous year (F3Q23), and 2.2% of revenue for the full year of 2023 (FY23). The increase was primarily due to elevated net write-offs on retail notes and a rise in the allowance for expected future losses.
Additionally, the percentage of non-performing receivables grew to 0.97% in F3Q24, up from 0.71% in F3Q23 and 0.75% in FY23. Delinquencies also experienced an uptick, reaching 1.09% of receivables, compared to 1.04% in F3Q23 and 1.00% in FY23.
In light of these financial dynamics, Deere has adjusted its full-year 2024 (FY24) outlook for FS net income, reducing the forecast from approximately $770 million to around $720 million. This revision suggests a 17% year-over-year increase in net income, or a 5% decrease when excluding the one-time accounting charge from the previous fiscal year (FY23).
In other recent news, John Deere has been in the spotlight due to several significant developments. The company recently settled bribery charges with the U.S. Securities and Exchange Commission, agreeing to pay $9.93 million over allegations of violating the Foreign Corrupt Practices Act. This comes on the heels of former President Donald Trump's threat to impose a 200% tariff on John Deere's imports if the company proceeds with its plans to shift production to Mexico.
On the financial front, Deere's third-quarter earnings surpassed expectations by 10%, mainly due to increased agricultural sales and margins. This strong performance has led several analyst firms, including Baird and Barclays (LON:BARC), to maintain their positive ratings on Deere's stock.
In addition, Deere has announced significant production halts at key facilities in the fourth fiscal quarter and a 2-3% price increase for 2025 equipment. The company also plans to reduce its global salaried workforce by a mid-single digit percentage, potentially yielding $230 million in savings as part of a restructuring plan.
InvestingPro Insights
Deere & Company's financial landscape, as revealed by InvestingPro data, offers additional context to JPMorgan's analysis. Despite the challenges in the Financial Services segment, Deere maintains a robust market capitalization of $111.37 billion. The company's P/E ratio of 13.84 suggests a relatively attractive valuation compared to historical norms, which may be of interest to value-oriented investors.
InvestingPro Tips highlight that Deere has raised its dividend for 3 consecutive years, with a current dividend yield of 1.44%. This commitment to shareholder returns is further underscored by management's aggressive share buyback program. These actions could be seen as a sign of confidence in the company's long-term prospects, despite the near-term headwinds in the Financial Services division.
However, aligning with JPMorgan's cautious stance, InvestingPro Tips also indicate that 10 analysts have revised their earnings downwards for the upcoming period, and sales are anticipated to decline in the current year. This corroborates the challenges outlined in the article, particularly the reduced outlook for FS net income in FY24.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Deere & Company, providing a broader perspective on the company's financial health and market position.
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