Recent quarterly earnings reports for the major farm machinery manufacturers were described as either “better than expected” or “could have been worse,” according to several industry analysts. This is to say, at least, AGCO and Deere exceeded analysts’ expectations. (CNH Industrial didn’t.)
In both cases, the companies’ sales and revenues for their most recent reporting period were lower than they were a year ago. AGCO’s second quarter net sales came in at $2 billion, which was down 17.2% year-over-year, or lower by 13.2% on a constant currency basis. Deere’s ag equipment sales were down 5% compared to their fiscal third quarter in 2019. (CNHI’s ag division sales were down 18% year-over-year.)
Of course, analysts are looking at earnings per share (EPS) when advising their clients, as they should. AGCO posted an EPS of $1.11 vs. industry consensus of 8 cents. Meanwhile, Deere reported earnings of $2.57 per diluted share compared with industry expectations of $1.26. So, indeed, both easily beat their Street’s forecasts. (CNHI posted an adjusted loss of 7 cents per diluted share vs. industry consensus of 6 cents per share.)
While EPS is where the rubber hits the road for investors in publicly-held companies, I think most of the rest of us still look at net sales, margins and other indicators as the guideposts for how business is doing. That being the case, there have been some positive signals recently. Looking ahead, both AGCO and Deere expect unit sales to be off by about 10% for the next reporting period, which is slightly better than earlier forecasts.
According to sales figures released by the Assn. of Equipment Manufacturers, July was a pretty good month for equipment dealers and manufacturers of tractors and combines. As reported by analysts at RW Baird, “Large Ag retail sales continue to recover, compact/midrange see continued outsized increases.”
- U.S. sales: combines +33.6%, 4WD tractors –21.2%, row-crop tractors +4.4%.
- Canada sales: combines +41.1%, 4WD tractors +88.2%, row-crop tractors +2.4%.
Mid-range and compact tractor sales, which really haven’t experienced the downturn of big ag equipment, continued to boom in July. The Baird analysts also reported, “Mid-range tractor sales increased 27.6% year-over-year in July (strongest monthly growth in nearly 16 years) after increasing 27% in June. Compact tractor sales were up 40.1% year-over-year (strongest monthly growth in nearly 17 years).”
Ag Equipment Intelligence’s most recent monthly Dealer Sentiments & Business Conditions Update survey also showed dealers’ optimism is positive territory at +4% (27% more optimistic vs. previous month, 50% same and 23% less optimistic). This down from +9% in the previous month, but way up from –40% and –66% in March and April.
Comments from dealers also seem to indicate that recent sales levels exceeded their expectations. One dealer in the Corn Belt said, “We thought the economy and our business would collapse after April, but it did the exact opposite.” Another Corn Belt dealer offered, “We had decent sales in wholegoods, parts and service despite lower commodity pricing. Our customers got to the point they needed to update some of their machinery.”
But maybe the best news coming from dealers is that their used equipment inventories are down to healthy levels. Commentary from the Dealer Sentiments survey indicates that at least some dealers have made solid progress in whittling down the volume of used machinery on their lots. One Lake States/Northern Plains dealer said, “Our used sales are up 30% year-over-year.” A dealer from the Mountain/Pacific region, added, “We are selling more late model used equipment than new despite aggressive deals.”
While used combine inventories remain a challenge, overall dealers in Ag Equipment Intelligence’s most recent monthly Dealer Sentiments indicate that overall inventories are in check.
A net of only 4% of dealers reported used equipment inventory as too high (22% too high, 60% in line, 18% too low). On the other hand, a net 7% of dealers report used high horsepower tractor inventories were too low (17% too high, 59% in line, 24% too low). But used combine inventories remain elevated with a net 40% of dealers reporting inventories as too high in June (42% too high, 56% in line, 2% too low).
Ben Cherniavsky, analyst with Raymond James, also noted this trend in his earnings coverage of Canadian farm equipment dealerships Cervus Equipment and Rocky Mount Dealerships. “There are early signs that the ag industry may be finding new religion with respect to the trade-in practices that have created such a glut of used equipment in the market.”
During the second quarter, Cervus Equipment’s new equipment sales were down 1%, but their used sales were up 51%. Rocky Mountain’s new equipment sales were down 12% but used sales jumped 43%.
In his note on Rocky Mountain, Cherniavsky said, “We attribute the revenue beat due to used unit sales which were up 43% year-over-year and 69% ahead of our forecast of $55 million. The better than expected results were achieved through a concerted effort by the company to focus on used equipment sales, driving total inventory down $115 million, or by 20.5% year-over-year.”
The positive results during the second quarter (third fiscal quarter for Deere) were all about beating expectations. But the next round of earnings will be a matter of “what have you done for me lately?” For now, we’ll take the positivity.