Deere’s Disappointing Outlook Shows Farm Recovery Is Elusive

0:00Hello, I'm Stephen Carroll. I'm in Brussels where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

1:02Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. One of my favorite American companies is Deere, John Deere Company, because it just to me, A, the products are just awesome. the big tractors and stuff like that, and B, they're such high quality, and they're just known around the world, great engineering, great technology, and they're just the backbone for the American farmer.

1:42It's the tool for the American farmer who feeds the world. So I just always followed this company really closely, and they came out with some numbers. Disappointing. It's a little tough out there in farm country, so we want to break it down with Chris Cialino. He covers all the big machinery companies for Bloomberg Intelligence, just one of our top, top analysts. He knows the story well. Chris, tell us what you heard from Deere with their most recent quarterly results. Yeah, thanks, Paul. You know, we expected pretty conservative guidance coming into the print. But this was, you know, well below our expectations.

2:14And I'd say even, you know, below some of the most bearish estimates out there. And really just kind of points to a lower for longer ag cycle here in North America. Their 26th net income guide calls for another 10 percent decline in 2026. It implies roughly earnings per share in the$16.50 range, which is 18 % below consensus. So it's not great news. I would say there are a couple positive takeaways, though. One, we do finally now have, I think, visibility and line of sight on trough earnings this cycle. And two, I think there's probably some inherent conservatism built into this outlook, just given the lingering trade and tariff uncertainty.

2:58Yeah, well, Chris, I'm looking at that net income guidance, which is down sharply from last year's levels, right? So talk to us about that. Do you think that is more of a cyclical thing? Or are we actually seeing something more structural that's playing out in this space? No, it's the cycle. I think we always tend to kind of undershoot on the way down and overshoot on the way up. But this cycle is playing out, I think, probably a little bit more severe than we had initially expected. Large ag retail sales here in North America are going to be down roughly 30 % this year. That's the second year of the decline.

3:37And now Deere is expecting another 15 % to 20 % decline in 2026. that would put volumes at the lowest level in more than four decades. I don't think I have a model that goes back far enough that shows that trough level of volume. So I think we're pretty confident that this will be the bottom. It's just kind of a lower floor. On the flip side, I mean, the earnings per share are still, you know, we think are structurally higher, just given some of the improvements they've made in the business model. But from a cycle and volume perspective, this is as bad as it gets. Why do you think that is? What's different around about this cycle versus past cycles here?

4:16Yeah, it's a combination of a couple of things. I mean, at the end of the day, farmers aren't going to buy equipment when you have crop prices that are down. You know, we've seen a little bit of improvement in corn and soy over the last three months. But at the end of the day, we've had too much production, oversupply. So let's put a lid on where crop prices have been going. We also have high input costs. So while we're starting to see some of that inflation moderate, a lot of the input costs for farmers are still very elevated, even on the interest, rent, labor, fertilizer. Costs are still too high.

4:50And then on top of that, you have all the trade uncertainty. Who am I going to sell my crops to? China had essentially stopped buying our soybeans. That's our largest ag customer in a particularly important market for deer and row crop farmers. So the combination of those three, I think, has really kind of, you know, extended the duration of this downturn. Yeah, well, we know, of course, that South American demand expected to be flat. So I suppose a lot of growth potentially coming from a North American farm economy. But what are the signs that you would want to look out for to suggest that, look, the worst really is behind this company.

5:25There's a turn forthcoming on the horizon. Yeah, I think firstly, you're going to look at crop prices. And I think we're starting to see a little bit of positive momentum there with China, you know, getting back into the U.S. market and making a few soybean purchases. So some stability on the crop price front, that would be one. And then two is really having China back in the market more consistently. Right. We need stability. We need predictability around their purchases. You know, they kind of fell short on their phase one trade deal agreement during the first Trump administration. So we need to see them consistently back in the market.

6:00And I think that will kind of give farmers confidence then, maybe then to go out and start replacing some of this aged equipment. Is there, in fact, concern that, again, last time the last Trump administration, the last time it deals reach with China to buy more U.S. ag, China did not really follow through at the end of the day. Is there a belief that maybe this time could be different? It's a good question. And I don't know. That's the million dollar question. Right. So I think ultimately this is why this is going to be a show me story. And until China, you know, delivers on some of their commitments and delivers consistently, farmers aren't going to go out and spend.

6:36So when we see that occur, I think that will lend more support to improvement in crop prices. And then I do think, you know, you start to see farmers start to go out and replace some of those, you know, aged equipment on their fields. But again, it's very much I think we need to see it to believe it first. Stay with us. More from Bloomberg Intelligence coming up after this.

7:03You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Earnings continue to come in. We had a couple of the tech companies, Dell and HP report numbers. Let's break it down with Woojin Ho, senior technology analyst, Bloomberg Intelligence, joining us from our Princeton HQ down in Jersey. All right, Woojin, let's start with Dell here. It looks like they're raising their annual projections for the AI server market.

7:37Is that still the heart of the story? Hey, Paul. Yeah, so it's the leading part of the story for results. They raised their AI server guidance from$20 billion to$25 billion, and a lot of that coming into the fiscal fourth quarter. And look, at the end of the day, we're starting to see some of these clustered Blackwell deals starting to come through. Think about the open AIs and the core weaves and so on and so forth that are billions of dollars for each of these deals. And that's probably going to carry through into fiscal 2027. Now, Ujin, a lot of focus, of course, in that positive story. I suppose the less positive spin here is the fact that this is going to cost Dell a lot of money to deliver these orders, right?

8:24And I think some analysts are taking a look at the margins that they reported, which came slightly under estimates, depending on the measure that you're looking at. But, you know, what is it, where does kind of the lay of the land go when it comes to kind of cost versus return for Dell's ability to deliver these AI servers and get some profit off of that? Yeah. Hey, Christina. So there's actually a tale of two stories behind the margins. The gross margin expectations, I was back into about 20.3%, 20.4 % on gross margins for the company. Consensus was at 22%. And you're right, AI server margins are lower.

9:07But that's always consistently been the case. Now, the one thing I will say, the AI server margins have improved this quarter relative to the fiscal two-quarter results as their supply chain has gotten better. Now, the bigger story is, and it actually applies to HP, is that the DRAM pricing has gone up and these higher commodity costs is potentially bringing a drag to not only their PC business, but their server business as well. So I think there's something else underlying that's driving the margins lower. All right. So let's talk about HP. HPE is the ticker. HPQ. Pardon? HPQ. HPQ. Exactly. OK.

9:52Talk to us about the current. I guess they gave an estimate that fell short on the profits. And I also saw that they're going to cut 4 ,000 to 6 ,000 employees through fiscal 28 by using more AI tools. See, that goes to my thing. I think my thesis has been from the beginning that AI is going to be a net job destroyer here. Talk to us about HP. What did they tell us this quarter? Yeah, so just as I was saying, Paul, the higher commodity cost is actually going to be pinching gross margins. The way I'm looking at it right now, they cut their EPS guidance. Well, they're saying that the higher commodity cost is going to pinch about 30 cents in EPS in fiscal 26.

10:32and that's roughly about 8 % to 10 % of earnings that's being pulled away because of the higher commodity costs. There's going to be more back-end loaded, so what that tells me is that they stockpiled inventory at least into the first half of the year. But I think there's a bigger part of the story, too. You don't cut back on a headcount. It looks like about an 8 % rift or reduction in force because of AI. if you're in a position of strength. So they've been in cost-cutting mode for the past five, six years now, and they continue to be in cost-cutting mode. So profits are going to be terrible, and they're going to try to preserve their cash flow to pay back their shareholders by cutting headcount.

11:17Yeah, well, interesting, Rujan. As you mentioned, they've been in cost-cutting mode for years now. This is their second round of major workforce reductions in three years. The shares, though, not really liking what they saw from HP yesterday. How do you think investors are interpreting this? Are they wanting more cost cuts? What do you think they're expecting from HP moving forward? Yeah. So, Christina, no one likes cost cuts. Shareholders may from a profits perspective. But you're not getting the profit gains, right? So consensus was at$3.35 in EPS. And if the 30 cents of the EPS cuts were primarily from the supply chain headwinds, you're not getting the gains from the cost cutting cuts, at least not in fiscal 2026, but hopefully a little bit better in 27 and 28.

12:08So it's more a wait and see what those impacts are going to be. And again, like I said, you're not cutting costs from a position of strength. It's more of a position of weakness. Hey, for Dell, going back to Dell, Silver Lake owns a big, big chunk of the stock here. What have they said about their intentions with the stock? Well, look, I believe Michael Dell has a seat with Silver Lake. I think they're going to hang on to it for quite a bit. I mean, if you think about where Dell was when they came out of being a private company to a public company, the returns on that has been fairly good. So if the AI story continues to take hold, right, and they continue to take market share and they can drive margin expansion, you know, I wouldn't be surprised if valuations continue to expand from here because we're still coming off the peak and the performance of the shares could continue to drive returns for Silver Lake going forward.

13:09Okay. Why don't you walk us through the Dell operating leverage standpoint here? What's your take on that? Because that's been kind of a point of, I guess, focus for markets recently. Just the fact that are these companies that aim to deliver servers or other equipment related to AI demand, are they going to have to borrow a ton of money to be able to deliver that for some companies? Like Oracle is not working out, but how is it working out for Dell? Yeah, I mean, the one great thing about Dell is they have a very solid balance sheet. They don't have much debt coming out. They deliver a lot of cash flow.

13:48There are only a handful of hardware companies that can do that. Cisco is another one that has a strong enough balance sheet to support that. And also, you know, going back to Paul's point on the Silver Lake relationship, Silver Lake actually has ties to some of these customers who are buying these larger deals. So funding really shouldn't be an issue with them. Now, to your point about margins and the margin leverage, having a diversified business is a very good thing for Dell. I know that the AI server margins are pretty weak and the PC margins are weak as well. But they have a fairly sizable traditional IT service business, traditional servers as well as storage.

14:27And that's going through an upgrade and modernization cycle. And that has higher margins and that helps cushion the lower margin profiles of the AI servers for them. So diversity in the business model is actually a good thing, not only for Dell, but for Cisco and HPE. Stay with us. More from Bloomberg Intelligence coming up after this.

14:51You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Lots of earnings out. One of them is Petco. Some concerns out there. Deanna Roseto-Pena, she's a consumer staples analyst at Bloomberg Intelligence. Deanna, talk to us about Petco. What did you learn with their earnings and what's their strategy going forward? Yes. So they were pretty in line with consensus in terms of phase two. EBITDA was very strong. It grew more than 100 basis points, EBITDA margin.

15:35So, you know, phase two of their strategy of creating profitable sales growth seems to be on track. Now, the next phase, which is actually getting comparable sales to grow, that's probably going to be an inflection they will probably see in the second half of 2026. Yeah, so Diana, very interesting that Petco actually managed to expand their margins, especially in an environment where costs are rising left and right. Talk to us about what sort of strategies they use to be able to achieve that. Is that something that they can sustain moving forward? Yes. So basically, they try to be a little bit smarter with their inventory.

16:17They're displaying better margin items on the shelves. They're relying more on services. They're trying to do a little bit more on the grooming side and on the vet side that generates a lot of income and a lot of profitability for them. So, you know, obviously cost store closings also helped in the quarter. So that is how they have managed to grow more than 100 basis points margins in the past three quarters. What is the competitive landscape of the pet food business? So they said that it's stabilized. In the past few quarters, we have seen the likes of Chewy and Petco say that consumers remain a little bit more conservative with their spending, particularly on discretionary items.

17:18It seems that that has stabilized and family formation or pet family formation has stabilized as well. We actually think that by 2026, we're probably going to see more pets being adopted, probably at the same pace as historicals, which is usually in the low to mid single digits. Yeah, well, I'm certainly not in the market for a new pet at the moment. I don't think my cat would allow for that. But Diana, why don't you talk to us a little bit more about what you mentioned earlier, right? I kind of like diversifying the services they offer. They're focusing on grooming as well. Are you seeing signs that this is translating into sustained traffic, especially into their stores?

17:56Yes, absolutely. We actually run a survey every, you know, we have been running it for the past three years. And actually this year was the first time that we saw that people were a little bit more willing to spend more on discretionary items compared to previous two years. So we actually saw that coming earlier this year than, you know, before everybody was saying it, that that was happening. So people seem to be a little bit more, while they're being very cautious in their spending, they're actually willing to, you know, groom and take their pets to the vet, for sure. All right. So in your retail space, where do you see some of the best opportunities?

18:36When you're talking to clients, what do they want to talk to you about in your names of coverage? Because you cover a lot of the consumer products at packaged goods companies and things like that. Yes. So on the pet side, definitely there seems to be a little bit more appetite for, you know, those those companies that seem to be on the upswing. We have Chewy that they have expanded their, you know, their revenue channels beyond merchandise and they're doing more ads and other, you know, revenues that are going to increase profitability on the long term. You have Petco that is probably going to start growing in the second half of next year.

19:17So by that time, it's probably going to be a good name that is probably going to be in the business for a while. Yeah, well, a lot of disruptors in this space for sure. But, you know, as far as kind of Petco is concerned, it seems like no dividends really, no buybacks are on the table at the moment. Is that something that could turn away investors? Maybe something that could push them towards some of these emerging competitors in this space? Yes. So that is something that they mentioned last night in the call. Obviously, they did not specify when they're going to start returning to shareholders.

19:55They're focusing on the strategy, getting the right inventory on the shelf, as well as getting profitability up there and getting leverage down to like less than three times EBITDA. So once that happens, they might be a little bit more willing to see where that goes. You know, it's something that the new CEO is thinking about, but not necessarily a timeline just yet. So, yeah, shareholders might not necessarily get a return similar to other packaged food or other consumer staple companies. But it's, you know, it seems that this is more of like an investment opportunity in terms of the strategy that they're going through.

20:40Stay with us. More from Bloomberg Intelligence coming up after this.

20:47You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. I tell you, just in the last year or two, this AI has crept into our vocabulary. Larry. I think before it was just big data. And then before that, it was just data. I don't know, but it's just everywhere. And I think it's, I'm being told it's also going to be part of our shopping experience as well as we head into the big shopping part of the year. I have no idea how that's going to work.

21:20Matt Britton, he does. He's the CEO of market research firm, Susie, and he is the author of a book entitled Generation AI, Why Generation Alpha and the Age of AI Will change everything. Okay, that kind of gets at you. Matt, thanks so much for joining us here. AI, shopping, go. What's going to happen? Well, you know, the internet looks like it's about to have a new front door for the last two decades. If we wanted to find out anything, whether it was for research or we're booking travel or we wanted to buy something, you know, the word Google has become a verb in our culture. But that is starting to shift.

21:59In fact, Google reported a 9 % year of decline in their classic link search in Q3 of 2025. And at the same time, ChatGPT saw 1.8 billion weekly queries as of October 2025. And over 40 % of those queries are search-like in nature. So consumers are sort of acting with their fingers, so to speak, in terms of the sites that they're going to. And they're going to these large language models. Now, it should be stated that Google also has its own large language model called Gemini, which released an incredible version, Gemini 3, just this week. So I'm not saying that Google itself is in trouble, but the notion of going to a traditional search engine to find things at the beginning of your shopping journey, I don't think will ever look the same way again.

22:42Yeah, Matt, I know exactly what you mean, because just yesterday I was searching in my chat GPT for more affordable dupes of this really expensive skincare product that I'm in the market for. So yes, exactly what you're talking about. But you know, for mine and Paul's generations, This is something that we're still kind of wrapping our heads around, right? But you were talking about Generation Alpha as the Generation Dots. Basically, this is innately something that they do. So talk to us about that sort of generational shift. How is that going to change the landscape of, I guess, kind of like consumer activity now that we do have this generation?

23:17This is just what they do. Use AI for everything. Absolutely. So I've spent my career, you know, I started my career in the year 2000. And back then, the new consumer was the millennial generation, which was the first generation to go up with the internet and household. And then 10 to 15 years later, the focus was on Gen Z, which of course is now known as a social media and iPhone generation, meaning that they never knew a world without social media and the iPhone. Gen Alpha, currently age zero to 15 years old, is going to be known as the AI generation. They are never going to know a world without AI, without a technology that you can interact with the same way that you interact with other people.

23:52So for them, if you think about it, they never will have lived through a world where you went to Google. And one day they may look at traditional search engines the way you and I look at rotary landlines. And for them, it's going to be just de facto behavior to go to a chat GPT to do research. And what's starting to happen is whether it's perplexity or chat GPT, they are all now integrating commerce functionality into their platforms where now you can actually buy on these platforms as well. So are brands ready for this? And I think I know the answer there. Well, they're not, and they're trying to figure it out.

24:30And the reality is it's just moving so fast. You know, it's really hard to understand how to behave when you have a new large language model coming out each week. For years, these brands were focused on search engine optimization. How does your brand come up first when someone's searching in your category? Now the big term is GEO, which is essentially optimization for AI models. And brands right now are clamoring to be the first brand that pops up if someone searches for a luxury handbag under$300 for a teenage girl, right? Every brand wants to be the first brand that ChatGPT recommends. And right now, frankly, it's kind of a black box and a mystery of how to get there.

25:06But it's going to be – companies that figure that out are going to suddenly find themselves in a very fortunate situation. It's going to create new winners and new losers very quickly. Yeah, well, Matt, just kind of shifting away a little bit from the AI factor here, and just kind of in general, kind of some of the emerging trends in shopping at the moment. You mentioned live shopping is something that is becoming more of a thing, certainly for younger generations. That's kind of how they shop on TikTok with creators kind of going live and telling them, buy this product. It's kind of like the home shopping network, but for the TikTok generation.

25:43Exactly. New QVC. Exactly. So, yeah, tell us more about that. So this year, for the first time ever, the average age of a first time mom in the U.S. is Gen Z, which means the average age of a mom who's head of their household and buying the Tide detergent and, you know, Gillette shaving cream for the home grew up looking at their phone. And when they are looking at their phone, they are not looking at content from traditional media networks, but instead content from creators and influencers. People have built large followings on these platforms through really compelling social media content. For years, these creators were kind of limited to earning money through awareness and impressions.