We reiterate our Neutral recommendation on
Deere & Company
), following its mixed results in third quarter fiscal 2012. The
company's third quarter earnings of $1.98 per share missed the
Zacks Consensus Estimate of $2.32. Revenues increased 15% year over
year to $9.59 billion, beating the Zacks Consensus Estimate of
DEERE & CO (DE): Free Stock Analysis Report
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The United States Department of Agriculture forecasts net farm
income to exceed $122 billion and net cash income is envisaged to
go beyond $139 billion in 2012. Owing to an early harvest in the
U.S., corn production stabilized.
Thus, it became clear that though the drought has hampered corn
production to some extent, it had not destroyed the crop this year.
The farmers are investing in the latest machinery to maximize
productivity, favoring Deere in this space.
The Architecture Billing Index of American Institute of Architects
became positive in August after remaining in the negative territory
for four consecutive months since April. The index increased 1.5
points from July to 50.2 in August 2012. Any reading above 50
indicates an increase in demand for architect's services.
Moreover, the new projects inquiry index was 57.2 in August, up
from 56.3 in July. In addition, the new highway bill will also
improve demand for construction equipment in the U.S. market. This,
in turn, will improve demand for Deere's construction equipment
However, margin expansion will be constrained in the next quarter
given the increased costs for the Interim Tier 4 technologies and
products, and higher research and development expenses. The new
products introduced by Deere have to comply with the stringent
engine emission regulations in North America and Europe. Deere
expects the cost in fiscal 2012 to be $475 million higher than the
fiscal 2011 levels, thereby, contracting margins.
Moreover, inventory levels increased in the third quarter due to
order cancellations from dealers. In certain areas harvesting was
done early during the quarter but Deere failed to dispatch supplies
in time. Therefore, increased level of inventories remains a
headwind for the company in the next quarter.
Deere retains a short-term Zacks #5 Rank (Strong Sell).
Illinois-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
dealers for the resale of products internationally.