CHICAGO (Reuters) – Deere & Co (DE.N) on Friday reported an unexpected increase in first-quarter profit and retained its full-year earnings forecast as signs of stabilization in the U.S. farm sector offset weak demand for construction machines, sending its shares soaring.
Its shares were last trading up 8% at $179.22 on Friday.
The world’s largest farm equipment maker’s earnings in the past quarters were buffeted by a nearly two-year-long U.S.-China trade war that hit U.S. agricultural exports, leaving farmers struggling to turn a profit.
But President Donald Trump’s interim trade deal with China has raised hopes of a recovery in farm machinery demand.
“Farmer confidence, though still subdued, has improved due in part to hopes for a relaxation of trade tensions and higher agricultural exports,” Chief Executive John May said in a statement.
However, there are risks that could upend this optimism.
A little over a month since the U.S.-China trade deal, which mandates a sharp jump in U.S. agricultural exports this year, farm commodity prices remain depressed as Chinese purchases have been way below the pre-trade war levels.
While there were always doubts whether China can boost U.S. farm purchases by the dollar amount agreed to in the interim deal, the outbreak of coronavirus has only added to the scepticism.
The world’s second-largest economy is struggling to get its economy back on track following the outbreak, which has so far killed over 2,200 in China and spread globally.
The epidemic forced Deere to close all of its eight facilities in China until the company determined it appropriate to reopen.
The virus is also threatening to affect its factories in the United States as it has cut off many components that Deere’s U.S.-based suppliers have been sourcing from China, raising the risk of production disruptions.
The company’s earnings statement did not provide the details of the virus’ impact on its operations.
Sales at its farm and turf business, which accounts for nearly 60% of Deere’s revenue, declined in the latest quarter, but higher price realization along with lower production costs and warranty expenses resulted in higher operating profit.
Deere expects an improvement in market conditions in the United States and Canada – its biggest market – despite forecasts for lower industry sales of farm machines in the region this year.
U.S. farm cash receipts, for example, are projected to be up this year. Prices, as well as the inventory of used equipment, are expected to be stable.
Meanwhile, Deere’s inventory of large farm machines – which account for nearly half of its agricultural equipment revenues – is running below the industry average.
A lower tax rate lifted the quarterly profit to $1.63 per share from $1.54 per share last year, topping Refinitiv’s average analyst estimate of $1.26 per share.
Deere retained its 2020 profit forecast of $2.7 billion to $3.1 billion.
Reporting by Rajesh Kumar Singh; Editing by Jane Merriman and Steve Orlofsky