Deere & Company (DE) announced second quarter results that beat estimates despite softening demand.

D.A. Davidson managing director of equity research, Michael Shlisky, joins Brad Smith and Madison Mills on Morning Brief to discuss the earnings print and examine the impact of tariffs.

To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.

Video Transcript

00:00 Speaker A

Deer trimming the lower end of its annual profit forecast due to none else than tariff uncertainty. Still the agricultural and construction equipment maker topping second-quarter expectations, the shares up over four percent. Joining us now, Michael Shlisky, DA Davidson Equity Research Managing Director. Great to have you on Michael. It's interesting. It seems like the worst being avoided for this stock in terms of the gut, in terms of the guidance is enough to lift it this morning. What's your reaction?

00:42 Michael Shlisky

Yeah, that's uh that's exactly right. Sure, they did take down the low end of the full-year range for their net income. At the same time, they did maintain their operating cash flow outlook, didn't change that at all. And most of the downside it is some of the different statements, but most of it appears to be the smaller end of the of discussions, some of the smaller ag equipment items and not the large tractors and and combines. That seems mostly unchanged.

01:27 Speaker A

And so, as you're looking through these results, I mean, we're taking a look at some significant declines in net sales and revenue at least year-over-year. So, how are you kind of assessing what the business opportunities look like from this point and and if that makes Deere investable or not?

02:02 Michael Shlisky

Well, I would say that there are two things going on there for the pretty big downturn on on the top line. First of all, Deere is still trying to reduce inventories in the distribution channel to make sure that when things do get better or get at least flatten out on the at the bottom that their inventories are fresh, they are clean, they're not going to be discounted heavily. And so, they are underperforming the retail sales. In other words, they are building a lot less than they're selling in the actual dealerships. Um so that's the that's the um, that's the uh, the first part of it. If you look at what dealership activity actually took place in the, in the second quarter, it shows that sales were actually down only about 7.5%. So, to have their numbers down 15, 20% for the year, they're clearly trying to to clear out inventory. The second thing beyond that's going to come down to the current crop addition. Can the weather hold up in what's, what's just going to put in the ground in the Corn Belt? Will we see a drought? Will we see a, um, a flood, etc.? Those kinds of issues are going to be very important through the end of August.

04:14 Speaker A

Yeah, and I can't believe we haven't talked about the tariff impact on those crops at all as well because this is something when we talked to farmers on our program that they cite as a huge concern for them, and of course, it's a concern for income of a company like Deere relying on farmers buying equipment from them. But the company did say in these results that they took into account any potential tariff impact. Do you believe them?

04:59 Michael Shlisky

Yes. Um in fact, the impact is a little bit less than you might think. Everyone has to eat, and that's globally. Doesn't matter what country you're in. And so, while yes, tariffs could affect the farmers here in the United States, that would be a, a tough thing to bear. Um somebody else in a different region is going to benefit. Their crops are going to be in more demand because folks can't starve. And so, it sounds like if, let's say, China starts to import less US soybeans, they'll just get more from South America. Deere sells plenty of tractors there. They'll have no issue with growth in that, in that, you know, region instead. So in that respect, ag is a little bit different than most other end markets out there.

06:16 Speaker A

Michael, as I'm taking a look at some of the industry outlook and across geographies right now, two areas really stick out, and it's South America. They're anticipating that that is essentially going to be flat in their unit sales. And then also flat unit sales in Asia. What do you take away from that? Knowing how much they want to invest further into their relationships and their pipeline in South America, I believe they have their investor day in Brazil coming forward in June. And then additionally in Asia, where as of right now, in the middle of a geopolitical tension-filled moment and environment, is there a headwind to selling US-born equipment into that region and some of the mind-share sentiment?

07:31 Michael Shlisky

Yeah, sure. Um in South America, especially in, in Brazil, you pretty much have to make the machine in the same place in which you sell it. So in Brazil, Deere has a full manufacturing footprint there, and they sell mostly within South America. It's the most rapidly growing area of the world as far as crop acreage for corn, for soybeans, etc. They're even adding in an additional season per year if they, if they can of additional crops. So it's important that, that Deere that they grow there. As I mentioned, some of the uncertainties from a tariff perspective between the US and China, two major, you know, growers and buyers of the, of the crop. The third place is Brazil, and they very well may end up being a medium to long-term winner here. As far as Asia goes, they like to oftentimes go by the strong brand name. There's not a stronger brand name in ag than Deere. So, I'm not surprised to see that, you know, Deere is trying to consolidate market share and grow in these faster-growing areas.

09:24 Speaker A

What's going to happen to this stock the next time the president makes it a talking point? Obviously, it came up a lot on the campaign trail. How concerned are you about that happening again and the volatility that may cause in the price action?

09:47 Michael Shlisky

Yeah, I mean, it's going to be, that's going to be interesting. When you look back, what's happened in the past when you had tariffs back in 2017, 2018, farmers got supported by the USDA in, in, in the end. There were some special payments made to help support their incomes. Mostly, it's kind of shore up balances. They probably won't be used to go down to the store and buy the latest tractor, but it does help farmers. Uh it seems like the government, both parties have a strong interest in keeping farming viable, thriving here in the US. A little bit about difference in the policy as to how they get there. But it does seem like there's a pretty, pretty strong support. And if things get truly, truly bad, there there could be additional support given.  Related Videos

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