Agricultural and Industrial Leaders of 2023

According to Seeking Alpha, John Deere is expected to lead the industrial sector as we progress through 2023, primarily due to rising farm equipment sales and increasing grain prices, which are anticipated to enhance profitability for the manufacturer and retailer.

A Reuters report indicates that John Deere's ability to navigate supply chain challenges, which have plagued the company since the onset of the COVID-19 pandemic, will play a crucial role in its success. Recognized as a key player in the agricultural and industrial sectors, John Deere has surpassed its competitor Caterpillar to become the largest farm and heavy construction equipment firm by market capitalization.

Matt Arnold from Edward Jones is a notable analyst closely monitoring John Deere's stock performance and earnings forecast. For further insights, you can explore one of his recent stock evaluations on the company.

Additionally, there is a strong correlation between equipment manufacturing and global commodity prices. For John Deere, fluctuations in grain and fertilizer prices significantly impact their financial performance. Following Russia's invasion of Ukraine on February 24, 2022, Curt Blades, senior VP of the Association of Equipment Manufacturers (AEM), remarked, "The ongoing strength in commodities is fueling substantial sales growth, particularly in larger row-crop units. With fuel prices trending upward, more farmers may seek the efficiencies offered by new equipment."

Mark Stock, CEO of Big Iron Auctions, a platform for used farm and construction equipment, noted a surge in demand for pre-owned machinery following the onset of the Russia-Ukraine conflict, citing that a 2012 model John Deere 9460R had appreciated to $176,000.

However, it is essential to recognize the evolution of the company since John May became CEO on November 4, 2019. On February 26, 2020, May emphasized the company's focus on three key areas: innovation in ag-precision technologies, raising earnings forecasts to unprecedented levels, and making acquisitions to expand scale, such as the acquisition of Wirtgen Group to bolster their construction and forestry operations.

The company's commitment to technological advancement is reflected in a strategic plan presented to shareholders in February 2022, which outlined objectives to enhance product autonomy, connectivity, and sustainability, thereby solidifying its position as a global leader in the agricultural and construction sectors.

In a significant move, CEO John May was invited to deliver the keynote address at the Consumer Technology Association (CTA 2023) event. In his speech, he remarked, "The potential for technology and sustainability to make a positive impact is most evident in agriculture, where farmers are increasingly tasked with feeding a growing population. John Deere is dedicated to developing purposeful technology to enhance efficiency and sustainability for our customers, whose work affects everyone."

Notably, Matt Arnold from Edward Jones indicated that global demand for John Deere's products is likely to be influenced by three major factors: rising grain prices, economic recovery, and investments in infrastructure.

Since 2022, John Deere has also made significant investments in autonomous machinery.

However, an unexpected development occurred on January 8, 2023, when a memorandum of understanding (MoU) was signed between the American Farm Bureau Federation (AFBF) and John Deere regarding the right to repair (R2R) law. This agreement marked a significant victory for American farmers while raising questions about potential regulatory hurdles that could impede John Deere's ability to fulfill the terms of the agreement.

The MoU, initially signed at the 2023 AFBF Convention in San Juan, Puerto Rico, ensures that farmers will have access to diagnostic and repair codes, service manuals, and product guides from John Deere. It also allows farmers to purchase diagnostic tools directly from the company and receive assistance in ordering parts and products.

This has been a pressing issue for both manufacturers and suppliers, particularly as parts shortages have become increasingly problematic for farm equipment during the COVID-19 pandemic.

"Photo by Boom & Bucket on Unsplash"

Caterpillar's Concerns About China's Economy

Amid the discussions surrounding China's reopening and its impact on the global economy, Caterpillar CEO Jim Umpleby has expressed concerns about softening demand for the company's machinery and industrial equipment in China.

Bloomberg highlighted that Caterpillar's industrial equipment sales may be negatively impacted if China's construction and manufacturing sectors do not accelerate as anticipated during this phase of reopening in 2023.

Caterpillar stands as the leading global brand for industrial equipment, and the company announced plans to relocate its global headquarters from Deerfield, Illinois, to Irving, Texas, on June 14, 2022. In 2022, Caterpillar generated $59.4 billion in sales from its construction, energy, and mining equipment.

For any development project, securing the appropriate industrial equipment is crucial, and Caterpillar's reputation for reliability makes it a go-to choice. The company offers a diverse range of equipment models catering to various energy sources, including off-highway diesel engines, natural gas engines, industrial gas turbines, and diesel-electric locomotives.

Given these factors, China represents a vital market for Caterpillar. As the world's largest consumer of global commodities and a leading manufacturer, China’s rapid economic growth and evolving lifestyle demands pose significant challenges for its construction and property sectors.

After announcing its Q4 2022 earnings, CEO Umpleby stated, "Our global team achieved one of the best years in our nearly century-long history, including record full-year adjusted profits." However, investor analysts have become cautious about Caterpillar's outlook in light of the news regarding China's soft demand.

The Investor's Business Daily placed Caterpillar's stock "out of the buy range" on the New York Stock Exchange (NYSE) for at least Q1 2023. The stock had previously been a standout performer among industrials throughout 2022. After an upward trend from $182.84 on January 31, 2021, to $244.02 on June 6, 2021, the stock experienced a decline for most of H2 2021.

Caterpillar's stock regained momentum in Q1 2022, reaching $228.94 on January 16, 2022, before experiencing volatility throughout H1 2022, ultimately peaking at $264.54 on January 29, 2023, only to fall to $247.79 by February 18, 2023.

According to Matt Arnold, the performance of Caterpillar's stock was initially buoyed by optimistic expectations regarding China's reopening of its domestic construction sector at the start of 2023. However, the lack of demand for Caterpillar's excavators—considered a benchmark for the company's output in China—has raised concerns about industrial economic factors during this reopening phase.

A review of Caterpillar's performance since 2021 indicates that its sales growth in mining and energy sectors has been outpacing demand from the construction sector. Despite ongoing supply chain challenges stemming from the COVID-19 pandemic, the demand for Caterpillar's bulldozers and mining trucks remained robust as the global economy sought to recover.

In 2021, Caterpillar's sales of construction equipment amounted to $11.2 billion, with 72% of these sales directed toward customers in the Asia-Pacific region. While headwinds in this region were largely offset by strong demand for new energy and mining ventures in 2022, Caterpillar surprised Wall Street with a reported net income of $2.04 billion in Q3 2022.

Entering 2023, Caterpillar's prospects appeared promising due to rising demand for construction equipment and favorable trends in energy and mining markets.

What lies ahead?

The reopening of China remains a critical factor. After reporting Q1 2023 earnings, CEO Umpleby remarked, "We discussed the slow pace of China's recovery, and we continue to expect it to be below 2022 levels."

The Caixin China General Manufacturing PMI report published on February 1, 2023, provided insights into China's manufacturing output, revealing strengths in supplier delivery times and future production expectations, while labor inefficiencies related to COVID-19 infections and raw material costs were highlighted as weaknesses.

Reflecting on comments made by CEO Umpleby in a CNBC article on January 21, 2019, regarding demand for construction equipment in Asia-Pacific, he stated, "Our outlook anticipates modest sales growth based on the fundamentals of our diverse end markets and the macroeconomic and geopolitical environment."

This suggests that, as demand for construction equipment may decline, the company wil