Deere Misses Revs, Outlook Shrinks - Analyst Blog

By Zacks Equity Research,

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Deere & Company 's ( DE ) third quarter fiscal 2012 earnings were $1.98 per share compared with the year-ago quarter's earnings of $1.69. Earnings missed the Zacks Consensus Estimate of $2.32 per share.

Operational Update

Deere's worldwide total sales increased 15% year over year to $9.59 billion, beating the Zacks Consensus Estimate of $9.49 billion.

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $8.93 billion, a 16% year-over-year increase including a price rise of 5% and an unfavorable currency translation effect of 5%. On a geographic basis, equipment net sales were up 28% in the United States and Canada, and remained flat year over year in rest of the world.

Cost of sales in the quarter rose 16.6% to $6.8 billion. Operating profit improved 12.6% year over year to $1.21 billion in the quarter.

Segment Performance

The Agriculture & Turf segment's sales increased 14% to $7.2 billion, led by higher shipment volumes and improved price realization, partially offset by a negative currency translation. Operating profit at the segment improved 18% to $1.0 billion.

The increase in operating profit resulted from higher shipment, improved price realization, partially offset by higher raw material and production costs as well as research and development expenses.

Construction & Forestry saw year-over-year sales growth of 23% to $1.66 billion, ascribed to higher shipment volumes and improved price realization. The segment operating profit increased 2.7% year over year to $113 million, driven by higher shipment and improved price realization, partially offset by higher production and raw material costs along with higher expenses related to SG&A and R&D.

Net revenues at Deere's Financial Services operations were $565 million in the reported quarter, up 2.7% from the year-ago quarter. Net income in the segment was $110.4 million, down from $125.6 million in the year-ago quarter.

Results decreased year over year, driven by higher SG&A expenses, narrow financial spreads and higher reserves for crop insurance claims, partially offset by a higher credit portfolio and lower provision for credit losses.

Financial Position

As of July 31, 2012, Deere had cash and cash equivalents of $3.4 billion, down from $3.6 billion as of July 31, 2011. Long-term borrowings increased to $21.2 billion as of July 31, 2012, from $15.9 billion as of July 31, 2011. Net cash used for operating activities for nine months ended at fiscal 2012 was $1.14 billion compared with $636.1 million in the corresponding prior-year period.

Looking Forward

Deere expects equipment sales to grow around 13%, down from 15% in fiscal 2012. The guidance includes an unfavorable currency-translation impact of 4% for the quarter and 3% for the year. Net income is projected at $3.1 billion, down from the previous expectation of $3.35 billion.

Segment-wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 13%, down from the previous guidance of 15% for full-year 2012, which includes a 4% negative impact of foreign currency translation.

Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow by more than 10% for 2012. While sales in Western and Central Europe are expected to be flat; sales in the Commonwealth of Independent States are expected to witness strong growth.

Growth in Asia is expected to be down moderately due to soft markets in China and India. In South America industry sales are expected to be down by 5%-10% due to uncertainty and draught conditions prevailing in Argentina. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat to up 5%, driven by draught conditions in the U.S.

Construction and Forestry equipment are expected to improve 17% for 2012, while world forestry markets would be flat year over year. Net income from Financial Services is estimated at $450 million, down from $465 million.

Our View

The ongoing draught conditions prevailing in the U.S. may affect Deere's performance in the fourth quarter. Moreover, soft economic conditions in China and India are expected to weigh on revenues moving forward.

Deere faces competition from the likes of AGCO Corporation ( AGCO ) and CNH Global  NV ( CNH ). Deere retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

AGCO CORP (AGCO): Free Stock Analysis Report
CNH GLOBAL NV (CNH): Free Stock Analysis Report
DEERE & CO (DE): Free Stock Analysis Report
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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: AGCO , CNH , DE

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