Deere & Company
) went up 2.8% during the pre-market trading session today, Feb
12, as the company reported record net income for the first
quarter of fiscal 2014 (ended Jan 31, 2014). Net income in the
quarter was $681 million, up 5% from $650 million in the
prior-year quarter. Despite moderate demand from farmers for
Deere tractors, harvesters and other agricultural machinery due
to lower commodity prices, Deere's incessant efforts to cut down
costs led to the improvement in earnings.
First-quarter earnings per share were reported at $1.81, up 10%
from $1.65 per share earned in the prior-year quarter and way
ahead of the Zacks Consensus Estimate of $1.51. Deere delivered a
solid earnings surprise of +20% in the quarter.
Deere's worldwide total sales increased 3% year over year to
$7.65 billion, way ahead of the Zacks Consensus Estimate of $6.5
billion. Net sales of equipment operations (which comprise of
Agriculture and Turf, Construction and Forestry) were $6.9
billion, up 2% year over year, including a price rise of 2%,
offset by a 2% unfavorable currency translation. Region-wise,
equipment net sales were up 3% in the U.S. and Canada and 2% in
rest of the world.
Cost of sales in the quarter increased 4% year over year to $5.2
billion. Gross profit during the quarter was $2.46 billion, up 2%
year over year. Selling, administrative and general expenses
dipped 2% to $766 million. Operating profit improved 8% year over
year to $1.37 billion.
Operating income from equipment operations rose 6% year over year
to $891 million as price realization helped offset unfavorable
effects of foreign-currency exchange and a less-favorable product
The Agriculture & Turf segment sales increased 2% year over
year to $5.6 billion, attributable to benefits of price
realization and higher shipment volumes offset by negative
currency translation. Operating profit of the segment improved 4%
year over year to $797 million. The increase in operating profit
was driven by improved price realization, which offset
unfavorable effects of foreign-currency exchange and a
less-favorable product mix.
Construction & Forestry sales improved 4% year over year to
$1.35 billion. Operating profit in the segment surged 32% year
over year to $94 million, driven by lower production costs, lower
research and development expenses and price realization. However,
lower production volumes were a minor deterrent.
Net revenues at Deere's Financial Services operations were $587
million in the reported quarter, up 11% year over year. The
segment's operating profit was $182 million, compared with $197
million in the prior-year quarter. Net income in this segment was
$142 million compared with $133 million in the year-ago quarter.
The improvement stemmed from growth in credit portfolio and
favorable effective tax rate, partially offset by higher selling,
administrative and general expenses, lower crop insurance margins
and less-favorable financing spreads.
As of Jan 31, 2014, Deere had cash and cash equivalents of $3.2
billion, down from $3.5 billion as of Oct 31, 2013 and $3.7
billion as of Jan 31, 2013. Long-term borrowings were at $22
billion as of Jan 31, 2014 compared with $21.6 billion as of Oct
31, 2013 and $22.2 billion as of Jan 31, 2013. Net cash flow used
in operating activities was $746 million in the quarter compared
with $1.2 billion in the prior-year quarter.
Deere expects equipment sales to decrease around 2% year over
year for the second quarter of fiscal 2014. For the full year,
the company expects equipment sales to decline 3%. Deere projects
net income of $3.3 billion for fiscal 2014.
Segment-wise, Deere projects Agriculture and Turf equipment sales
to decline 6% for fiscal 2014. Even though commodity prices and
farm incomes are expected to remain at healthy levels in 2014,
they will be lower than 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
continued deterioration in the overall economy, lower commodity
prices and farm incomes.
Sales in the Commonwealth of Independent States are expected to
be moderately lower. Sales in Asia are expected to be up slightly
year over year. Deere expects sales growth of turf and utility
equipment in the U.S. and Canada to be about 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 an increase 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.
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 sentiment regarding capital
goods purchases is becoming more conservative due to lower
Deere will nevertheless benefit from recovery in the
construction sector. Furthermore, given its strong balance sheet,
the company can continue to increase dividends and repurchase
shares. However, continued weakness in European markets remains a
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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 operated through dealers for the resale of
Deere currently holds a Zacks Rank #4 (Sell). Some better-ranked
stocks in the machinery sector include
Altra Industrial Motion Corp.
Barnes Group Inc.
), all of which carry a Zacks Rank #2 (Buy).