Deere Starts 2012 on a Good Note - Analyst Blog

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Deere & Co. ( DE ) delivered earnings of $1.30 per share in its first quarter ended of fiscal 2012, comfortably exceeding the Zacks Consensus Estimate of $1.23. Results were 8% ahead of $1.20 earned in the year-ago quarter. The outperformance was largely driven by strong demand for farm machinery as well as increased sales of construction equipment.

Operational Update

Deere's worldwide total sales increased 11% year over year to $6.77 billion, beating the Zacks Consensus Estimate of $6.49 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $6.1 billion, an 11% year-over-year increase including a price increase of 4% and unfavorable currency translation effect of 1%. On a geographic basis, equipment net sales were up 5% in the United States and Canada and 21% in rest of the world.

Cost of sales in the quarter totaled $4.6 billion, up 12% year over year. Operating profit improved 7% year over year to $1.17 billion in the quarter.

Segment Performance

The Agriculture & Turf segment's sales increased 8% to $4.7 billion, led by higher shipment volumes and improved price realization. Operating profit at the segment was $574 million, up 3% year over year. The increase in operating profit resulted from higher shipment, improved price realization, partially offset by higher raw material costs and higher manufacturing overhead costs related to new products.

Construction & Forestry posted a year over year sales growth of 22% to reach $1.4 billion ascribed to higher shipment volumes and improved price realization. The segment operating profit increased 41% year over year to $124 million driven by higher shipment, production volumes and improved price realization, partially offset by higher raw material costs.

Net revenues at Deere's Financial Services operations were $548 million in the quarter, up 8% from the year-ago quarter. Net income in the segment was $119 million, inching up from $118 million in the year-ago quarter. Benefits from growth in credit portfolio, revenue from wind energy credits and lower provision for credit losses were offset by higher crop insurance claims and increased selling, administrative and general expenses.

Financial Position

As of January 31, 2012, Deere had cash and cash equivalents of $3.39 billion, down from $3.65 billion as of October 31, 2011. Long-term borrowings decreased slightly to $16.92 billion from $16.86 billion as of October 31, 2011. Net cash used for operating activities for the quarter was $1.23 billion compared with an usage of $0.9 billion in the previous year quarter.

Looking Forward

Deere expects equipment sales to grow around 15% in fiscal 2012. The guidance includes an unfavorable currency-translation impact of 3%. Net income is estimated at $3.275 billion.

Segment wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 15% for full-year 2012, benefiting from favorable global farm conditions, and benefits from introduction of advanced new products throughout the globe and from major expansion projects particularly in emerging markets.

Construction and Forestry equipment are expected to improve 18% for 2012, reflecting slightly improved market conditions and activity outside of the U.S. and strength in Canada. Construction equipment sales to independent rental companies are expected to improve further.

Sales growth is also expected to be aided by advanced new products and geographic expansion. Net income from Financial Services is estimated at $460 million.

Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow 10% for 2012. Western and Central Europe is expected to be flat to up 5%. Sales in the Commonwealth of Independent States are expected to see moderate gains while growth in Asia is expected to be strong. Industry sales of turf and utility equipment in the U.S. and Canada are expected to increase slightly.

Our Take

Deere continues to remain focused on expanding its production capacities. The company's investments to expand capacities as well as to offer new products favorably position it to cater to the increasing demand for food, shelter and infrastructure, thereby fueling top line growth in the upcoming quarters.

Deere also pays a regular quarterly dividend and increases the dividend from time to time, which enhances shareholders value. The company currently retains a Zacks #2 Rank (short-term Buy recommendation).

Illinois-based Deere & Co. 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 dealers for the resale of products internationally. Deere competes with Caterpillar Inc. ( CAT ), CNH Global NV ( CNH ) and Kubota Corporation ( KUB ).

CATERPILLAR INC ( CAT ): Free Stock Analysis Report
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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 Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: CAT , CNH , DE , KUB

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