Deere’s profits double. Investors sell.

Friday morning, the agricultural equipment giant Deere & Company (OF -14.07%) announced that it had just increased its profits by approximately twice as fast as it increased its sales. So, of course, investors…sold the stock!

Reporting its financial results for its fiscal 2022 second quarter on Friday, Deere said its net sales and revenue were $13.4 billion, up 11% year-over-year. Profits, however, increased 20% year-over-year at $6.81 per share, outpacing sales growth on the back of a net profit margin that increased nearly a full percentage point.

Either way, investors sold Deere in droves. In the first two hours of trading on Friday, Deere stock fell 11.5%.

Image source: Getty Images.

Sowing seeds, reaping benefits

Given the current macroeconomic environment (i.e. a war in the “breadbasket of Europe” that has decimated grain exports to the developing world and sent fertilizer prices skyrocketing), No one will be surprised to learn that Deere’s industrial-scale agriculture division (“precision farming and production”) drove sales last quarter. Sales in this business segment, Deere’s largest, jumped 13% year-over-year, offsetting slower growth in construction and forestry (sales up 9%) and particularly in the consumer-focused smallholder agriculture and turf segment (sales up 5%).

Moreover, Deere predicts that this momentum will strengthen throughout the year (if not longer). Giving new guidance for the remainder of fiscal 2022, Deere expects large agriculture sales to eventually grow 25% to 30% this year, and to increase construction and smallholder agriculture up to 15% each.

Management further predicted that its earnings this year would be between $7 billion and $7.4 billion. Spread over approximately 307 million shares outstanding, this equates to $23.45 per share in the middle of the indicative range, and implies that Deere stock is selling for approximately 13.8 times current year earnings. This also implies that Deere will solidly beat analysts’ projections for it to earn just $22.70 a share this year. So…why are investors dumping Deere stock in response to this good news?

It’s really hard to say. By all accounts, Deere is heading into its most successful and profitable year ever. With high and rising demand, farmers likely to live up to grain profits and able to afford new farm equipment, Deere beat profits in the second quarter and promises to continue beating profits throughout of the year.

Admittedly, at 13.8 times earnings, Deere looks like a little a bit pricey given its projected long-term growth rate of 15% and tiny dividend yield of 1.2%. Still, overall, the earnings news looks good to me — and a better reason to buy Deere stock than sell it.