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Deere Posts Mixed Retail Sales in May - Analyst Blog

Posted
7/11/2013 9:57:00 AM
By: Zacks.com
Referenced Stocks:CAT;DE;KUB;LNN

Shares of agricultural, forestry and construction equipment manufacturer Deere & Company ( DE ) fell 1.2% after it announced mixed retail sales for May.

Sales Performance

In the agriculture and turf segment, Deere's U.S. and Canada utility tractor sales growth were flat in May, compared to the industry wide sales growth of 4%. Deere's inventory was reported to be lower than the industry wide inventory of utility tractors, which stood at 49% of the previous 12 months sales.

However, sales of row crop tractor outperformed the industry growth rate of 27% during the month. The industry inventory of row crop tractors were 33% of previous 12 months sales and Deere's inventory of row crop tractors was lower than the industry inventory. Sales of four-wheel drive tractor sales decreased in double digits in May, in stark contrast to the 8% growth witnessed across the industry during the month. Deere's inventory for the four-wheel drive tractor was in line with the industry inventory at 23% of the previous 12 months sales.

Combine sales fared better, pitted against 18% growth in the industry. Deere's inventory for the combines was slightly lower than the industry inventory at 20% of the previous 12 months sales. Retail sales of selected turf and utility equipment were up in double digits. In Europe, retail sales of tractors were up in low double digits, while combine sales went down by double digit. Coming to the Construction and forestry segment, sales went up in single digits.

Compared with the company's performance in April, sales for utility tractor remained the same while row crop tractors fared better. Sales for four-wheel drive contracted by double digits in May as compared with low double-digits decline in April. In Europe, tractor sales were up in low double digits as against single-digit contraction in April. Combine sales contracted in double digits versus flat sales in April.

Peer's Performance

Deere's performance was better than that of Caterpillar Inc. ( CAT ). Sales growth for the construction and mining equipment continued to be in the red with a decline of 7% in May, the sixth consecutive month of decline.

Earnings and Expectations

Deere reported record second quarter 2013 earnings of $2.76 per share, up 6% year over year. Quarterly sales also increased 9% to $10.9 billion. Both were ahead of the respective Zacks Consensus Estimates. The Agriculture & Turf segment sales increased 12% to $8.69 billion, attributable to higher shipment volumes and improved price realization, partially offset by a negative currency translation. Construction & Forestry experienced a 6% year-over-year decline in sales to $1.57 billion, due to lower shipment volumes.

Deere expects equipment sales to grow around 3% in the third quarter of fiscal 2013 and 5% for the full year. Segment-wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow 7% in fiscal 2013. Higher commodity prices and strong farm incomes are expected to boost demand for farm machinery during the year. Furthermore, Deere's sales are expected to benefit from global expansion and new lines of advanced equipment.

Construction & Forestry equipment are expected to decline 5% in 2013, driven by cool, wet weather conditions in North America, flat sales in world forestry markets and reflecting a cautious outlook for the U.S. economic growth. Weakness in the European markets will continue to affect the forestry markets.

Conclusion

Deere will benefit from recovery in construction sector and strength in Brazil. However, continued weakness in the European markets, additional import duty imposed in Russia, Kazakhstan and Belarus, margin headwinds that include higher production costs associated with interim Tier 4 as well as global growth expenses remain concerns.

Deere currently retains a Zacks Rank #3 (Hold). Other stocks in the same industry that are worth a look include Kubota Corporation ( KUB ), which retains a Zacks Rank #1 (Strong Buy), and Lindsay Corporation ( LNN ), which carries a short-term Zacks Rank #2 (Buy).



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