Deere Shares Dip as Earnings Lag Y/Y - Analyst Blog

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Shares of Deere & Company ( DE ) dipped 1.78% during the pre-market trading session today, May 14, on reporting a decline in both its top and bottom lines for the second quarter of fiscal 2014 (ended Apr 30, 2014) and a trimmed guidance for worldwide equipment sales for fiscal 2014.

Earnings per share were reported at $2.65, down 4% from $2.76 earned in the prior-year quarter. Deere's second-quarter earnings, however, beat the Zacks Consensus Estimate of $2.40, delivering an earnings surprise of +10%.

Lower shipment volumes, unfavorable effects of foreign-currency exchange, and a less favorable product mix partially offset benefits from price realization and a lower effective tax rate, thereby leading to the decline in earnings.

Operational Update

Deere's worldwide total sales dipped 9% year over year to $9.95 billion, surpassing the Zacks Consensus Estimate of $9.55 billion. Net sales of equipment operations (which comprise of Agriculture and Turf, Construction and Forestry) were $9.2 billion, down 10% year over year, including a price realization of 2%, offset by a 1% unfavorable currency translation. Region-wise, equipment net sales were down 12% in the U.S. and Canada and 6% in rest of the world.

Cost of sales in the quarter decreased 8% year over year to $6.87 billion. Gross profit during the quarter was $3.08 billion, down 10% year over year. Selling, administrative and general expenses dipped 11% to $846 million. Operating profit declined 15% year over year to $1.6 billion.

Operating income from equipment operations plunged 18% year over year to $1.36 billion as lower shipment volumes, the unfavorable effects of foreign currency exchange, and a less favorable product mix offset the benefit of price realization.

Segment Performance


The Agriculture & Turf segment sales decreased 12% year over year to $7.6 billion, as lower shipment volumes, sale of John Deere Landscapes and the unfavorable effects of currency translation, partially offset price realization. Operating profit of the segment declined 22% year over year to $1.2 billion due to same reasons mentioned above along with a less favorable product mix.

Construction & Forestry sales improved 2% year over year to $1.6 billion, attributed to higher shipment volumes. Operating profit in the segment surged 63% year over year to $132 million, driven by higher shipment volumes, lower production costs, lower selling, administrative and general expenses, partially offset by higher sales incentive costs.

Net revenues at Deere's Financial Services operations were $572 million in the reported quarter, up 7% year over year. The segment's operating profit was $229 million, compared with $198 million in the prior-year quarter. Net income in this segment was $148 million compared with $125 million in the year-ago quarter. The improvement stemmed from growth in credit portfolio, partially offset by higher selling, administrative and general expenses.

Financial Position

As of Apr 31, 2014, Deere had cash and cash equivalents of $3.1 billion, down from $3.6 billion as of Mar 31, 2013. Long-term borrowings were at $23 billion as of Apr 31, 2014 compared with $21.7 billion as of Mar 31, 2013. Net cash flow used in operating activities was $832 million in the quarter compared with a usage of $1.16 billion in the prior-year quarter.

Looking Ahead

Deere expects equipment sales to decrease around 4% year over year for the third quarter of fiscal 2014. For the full year, Deere trimmed its forecast by 4% from the previous expectation of a 3% dip. Deere, however, maintained its net income projection of $3.3 billion for fiscal 2014.

Segment-wise, Deere projects Agriculture and Turf equipment sales to decline 7% for fiscal 2014, down from the previous expectation of a 6% drop. This includes a negative currency translation effect of about 1%. Farm incomes are expected to be lower than in 2013, which will have a dampening effect on demand for large farm equipment.

Region-wise, Deere expects that industry farm machinery sales in the U.S. and Canada will decline 5% to 10% year over year in fiscal 2014. In Europe, sales are projected to be down 5% due to lower commodity prices and farm income. Sales in the Commonwealth of Independent States are expected to be significantly lower. Sales in Asia are expected to be up slightly year over year. In South America, industry sales of tractors and combines are expected to decline by 10% year over year.

Deere expects sales growth of turf and utility equipment in the U.S. and Canada to be flat to up 5%, reflecting improved market conditions. The company foresees global sales for Construction & Forestry equipment to advance about 10%, partly because of the recovery in the U.S. economy and a rise in housing starts. Global forestry sales are expected to be higher, driven by economic growth and higher sales in European markets. Net income from Financial Services is estimated at around $600 million.

Our View

Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Meanwhile in the near term, even though net farm income remains at high levels, farmer sentiments regarding capital goods purchases are becoming more conservative due to lower commodity prices.

Deere will nevertheless benefit from recovery in the construction sector and stabilization in the European economy. Furthermore, given its strong balance sheet, the company can continue to increase dividends and repurchase shares.

Moline, IL-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells products in the U.S. and Canada through branch offices as well as through distributors and operates through dealers to resell products internationally.

Deere currently holds a Zacks Rank #4 (Sell). Some stocks that are worth considering within this sector include Gorman-Rupp Co. ( GRC ), Blount International Inc. ( BLT ) and Broadwind Energy, Inc. ( BWEN ). While Gorman-Rupp sports a Zacks Rank #1 (Strong Buy), Blount International and Broadwind Energy carry a Zacks Rank #2 (Buy).


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



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: BLT , BWEN , DE , GRC

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