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Agricultural and construction machinery company Deere (NYSE:DE) reported Q1 CY2024 results topping analysts’ expectations, with revenue down 15.4% year on year to $13.61 billion. It made a non-GAAP profit of $8.53 per share, down from its profit of $9.65 per share in the same quarter last year.
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Deere (DE) Q1 CY2024 Highlights:
- Revenue: $13.61 billion vs analyst estimates of $13.32 billion (2.2% beat)
- Adjusted Operating Income: $3.10 billion vs analyst estimates of $2.94 billion (5.4% beat)
- EPS (non-GAAP): $8.53 vs analyst estimates of $7.91 (7.8% beat)
- Lowered full year outlook for Construction & Forestry
- Gross Margin (GAAP): 42.3%, up from 25.5% in the same quarter last year
- EBITDA Margin: 26.6%, in line with the same quarter last year
- Free Cash Flow Margin: 10%, up from 4.6% in the same quarter last year
- Market Capitalization: $96.8 billion
Agricultural MachineryAgricultural machinery companies are investing to develop and produce more precise machinery, automated systems, and connected equipment that collects analyzable data to help farmers and other customers improve yields and increase efficiency. On the other hand, agriculture is seasonal and natural disasters or bad weather can impact the entire industry. Additionally, macroeconomic factors such as commodity prices or changes in interest rates–which dictate the willingness of these companies or their customers to invest–can impact demand for agricultural machinery.
Sales GrowthExamining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Deere’s 8.4% annualized revenue growth over the last five years was decent. This shows it was successful in expanding, a useful starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Deere’s annualized revenue growth of 12.5% over the last two years is above its five-year trend, suggesting its demand recently accelerated.
We can dig further into the company’s revenue dynamics by analyzing its three most important segments: Production & Precision Agriculture , Construction & Forestry , and Small Agriculture & Turf, which are 48.4%, 28.2%, and 23.4% of revenue. Over the last two years, Deere’s revenues in all three segments increased. Its Production & Precision Agriculture revenue (tractors, harvesters, tillage) averaged year-on-year growth of 24.2% while its Construction & Forestry (loaders, excavators, dump trucks) and Small Agriculture & Turf (mowers and other small vehicles) revenues averaged 12.1% and 2.5%.
This quarter, Deere’s revenue fell 15.4% year on year to $13.61 billion but beat Wall Street’s estimates by 2.2%. Looking ahead, Wall Street expects revenue to decline 16.3% over the next 12 months.
Operating MarginOperating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Deere has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 19.5%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.
Looking at the trend in its profitability, Deere’s annual operating margin rose by 11.2 percentage points over the last five years, showing its efficiency has meaningfully improved.
In Q1, Deere generated an operating profit margin of 22.8%, down 1.5 percentage points year on year. Conversely, the company’s gross margin actually rose, so we can assume its recent inefficiencies were driven by increased operating expenses like sales, marketing, R&D, and administrative overhead.
EPSAnalyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Deere’s EPS grew at an astounding 27.2% compounded annual growth rate over the last five years, higher than its 8.4% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Deere’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Deere’s operating margin declined this quarter but expanded by 11.2 percentage points over the last five years. Its share count also shrank by 14.5%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Deere, its two-year annual EPS growth of 31.6% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q1, Deere reported EPS at $8.53, down from $9.65 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 7.8%. Over the next 12 months, Wall Street expects Deere to perform poorly. Analysts are projecting its EPS of $33.21 in the last year to shrink by 29.7% to $23.34.
Key Takeaways from Deere’s Q1 Results We were impressed by how significantly Deere beat analysts' Production & Precision Agriculture revenue expectations this quarter. On the other hand, the company called out "challenging conditions in the global agricultural and construction sectors" and lowered its full year outlook further for the Construction and Forestry industry. Zooming out, we think this was a decent quarter, but the lowered outlook is weighing on shares. The stock is down 1.3% after reporting, trading at $380.83 per share.
