On Wednesday morning, John Deere (NYSE: DE) released the following statement:
As the largest global manufacturer of agricultural equipment, John Deere, like many others in our industry, faces significant economic challenges, rising operational and manufacturing costs, and reduced customer demand, including a 20 percent decline in sales from 2023 to 2024.
- This reduction in product demand and increased operational costs have unfortunately forced us to make tough decisions including layoffs at John Deere production facilities and reductions in our global salaried workforce.
Deere has already laid off nearly 1,500 employees this year. And that statement is the precursor to another round of layoffs that will lower headcount by 15%. That’s approximately 9,000 jobs.
Part of the reason for the layoffs is that Deere is moving some of its manufacturing capacity to Mexico. Deere isn’t the only company looking to cut costs by “near-shoring” manufacturing to Mexico. Virtually every car maker is doing the same thing. iPhone assembly company Foxconn, toymaker Mattel and medical device maker Medtronic are all making moves in Mexico.
But at a time when there’s a surge for U.S.-based manufacturing, Deere’s move is ticking some people off – one employee said, “The only reason for Deere to do this is greed.”
You could certainly argue greed – after all, Deere had more than $10 billion in net profit for 2023 and also spent $7.2 billion on share buybacks last year.
The last few years have been pretty good for Deere. Post-pandemic 2021 revenue was up 24% to $44 billion and grew another 20% in 2022 to $55 billion. Last year, revenue hit a record $61 billion.
But, 2024 revenue is forecast to fall to $45 billion and down to $44 billion next year. That’s a massive decline. It helps to explain why the company is panicking a little bit…
Picks and Shovels (and Tractors)
So after trashing Google’s AI business plan yesterday, I thought I’d offer some ideas on companies that have a clearer path to monetizing AI by making their products more useful – so-called “picks and shovels” plays.
We’ve already discussed a bunch of utility and power generation stocks as picks and shovels plays on the increased power demands from AI data centers.
Ag-tech has a pretty obvious path for AI to boost productivity and crop yields. Deere seems like a pretty good choice to benefit…except for the massive drop in revenue it’s experiencing.
The problem is that corn prices have fallen from nearly $8 a bushel in 2022 to around $4 a bushel today. Soybean prices have fallen from $17 to just under $11. I’m going to skip any comments about inflation for now (like why are Hint of Lime chips still $5.50 a bag when corn prices are in the tank) because I already know the answer (by the end of 2023, Frito-lay owner Pepsi had hiked prices by double digits for 7 straight quarters, far surpassing rises for its costs).
The point for Deere is that farmers are taking a massive hit on their income, and they can’t afford to buy cool tractors that you drive with an app on your phone. Weak pricing for farmers is expected to continue into 2025.
It’s amazing to see the post-pandemic recovery for stocks like Deere (5-year chart):
Support for Deere at $350 has been pretty solid. The lower highs are a concern.
Deere shares could hit $300 in a market sell-off, that would likely be a pretty good spot to buy.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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