Preview: US machinery makers eye bumper earnings for now, but inventory glut looms
26/07/2023 11:00
By Bianca Flowers
CHICAGO, July 26 (Reuters) - U.S. equipment makers are
likely to face excess inventory early next year as demand from
farmers and construction companies cools, though second-quarter
profit is expected to remain strong.
Equipment dealers have struggled to keep tractors and
combines in stock due to strong demand and supply-chain snarls
that have kept prices high and orders on backlog. They may soon
face the opposite problem of having too much inventory as demand
eases just as production picks up, industry experts said.
"We're watching this closely because we don't want to get
ourselves to where there's an oversupply," said John Schmeiser,
COO of North American Equipment Dealers Association (NAEDA), a
trade group that represents independent dealers.
Machinery sitting idle on dealer lots could jeopardize
manufacturers' margins next year.
In recent quarters, heavy equipment manufacturers including
Deere & Co DE.N and Caterpillar CAT.N have handily beaten
Wall Street earnings.
A slump for new orders from farmers and commercial customers
should make machinery manufacturers more conservative with
production, said Baird senior research analyst Mircea Dobre.
"If we continue to see these inventory increases, that
essentially poses a risk for production in 2024."
Higher borrowing costs have also battered manufacturing,
with the Institute for Supply Management reporting this month
that its manufacturing PMI remained stuck below the 50 threshold
in June for the eighth straight month. The downturn in new
orders for machinery and equipment, which includes construction
and farming, outpaced all other manufacturing industries,
according to data by S&P Global.
But Caterpillar has touted resilient sales from mining
customers and an increase in construction sales stemming from
U.S. infrastructure spending. Deere and CNH Industrial
CNHI.MI , which reports earnings on Friday, continue to see
operating margins for precision and agriculture products trend
upward as farmers look to cut costs on crop inputs, such as
fertilizers and pesticide applicators.
While farmers' balance sheets remain relatively strong,
economists at the Federal Reserve Bank of St. Louis are citing
"profitability concerns" in the second half of the year for
growers and the agriculture sector.
Caterpillar is expected to post second-quarter earnings next
week of $2.37 billion, up 39.5% from a year ago. Its rival Deere
is projected to post solid growth as well with net income of
$2.39 billion, a nearly 32% increase from the prior year. Deere
will report third-quarter results on Aug. 18.
(Reporting by Bianca Flowers in Chicago; Editing by Caroline
Stauffer and Matthew Lewis)
((Bianca.Flowers@thomsonreuters.com;))