Stocks are being repriced across the board as the sell-off on Wall Street intensifies. Technology companies, especially unprofitable and richly valued names, have been hit hardest. Yet even companies that boast sales growth and rising profits have not been spared.
Deere, the US tractor maker, turned in a solid performance on Friday. It overcame supply chain challenges to report an 11 per cent rise in sales and a 17 per cent increase in net income for its fiscal second quarter.
Better still, it raised its full-year profit outlook. It forecasts that demand for farm equipment will continue to benefit from “positive fundamentals” despite the cost pressures that many American farmers are facing.
All this stood in contrast to the string of disappointing results from big US retailers this week. But slight improvements are not enough. Deere’s shares fell over 12 per cent on Friday, wiping out its gain for the year.
In theory, US farmers should be well placed to benefit from higher agricultural prices. In practice, however, skyrocketing prices for everything from fuel to fertiliser could still hurt their bottom line.
One estimate from the US Department of Agriculture predicts that net farm income, a broad measure of profits, will drop 4.5 per cent to $113.7bn this year. Deere’s positive outlook may be shortlived.
As pandemic winners Walmart and Target have shown this week, inflationary pressure can flare up in unexpected ways. So far, Deere has been able to pass on much of its higher input costs to its end customers in the form of price increases. But this cannot be repeated indefinitely.
Following the sell off, Deere trades at just 15 times forward earnings — the lowest level since March 2020. The net farm income estimate for this year, while lower than 2021, remains higher than the two-decade average. If food prices can stay high for long enough, farmers will want to plough their extra income into new equipment. Analysts expect Deere to earn over $26 a share next year, compared with under $9 in 2020. Agricultural stocks can still be fertile investments if priced right.