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Deere Beats Q3 Earnings, Falls on Y/Y Decline & Weak View - Analyst Blog

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Shares of Deere & Company ( DE ) dipped 1.25% during the pre-market trading session today, Aug 13, on reporting a decline in both its top and bottom lines for the third quarter of fiscal 2014 (ended Jul 31, 2014). The company also trimmed its guidance for fiscal 2014 which dragged the share price to $85.40.

Earnings per share were reported at $2.33, down 9% from $2.56 earned in the prior-year quarter. Earnings, however, beat the Zacks Consensus Estimate of $2.19, delivering an earnings surprise of +6%.

Lower shipment volumes, higher production costs primarily related to engine-emission requirements and unfavorable effects of foreign-currency exchange, partially offset benefits from price realization.

Operational Update

Deere's worldwide total sales dipped 5% year over year to $9.50 billion, surpassing the Zacks Consensus Estimate of $8.77 billion. Net sales of equipment operations (which comprise of Agriculture and Turf, Construction and Forestry) were $8.7 billion, down 6% year over year, including a price realization of 2%, offset by a 1% unfavorable impact from currency translation. Region-wise, equipment net sales were down 8% in the U.S. and Canada and 4% in rest of the world.

Cost of sales in the quarter decreased 3% year over year to $6.61 billion. Gross profit during the quarter was $2.9 billion, down 8.9% year over year. Selling, administrative and general expenses dipped 11% to $820.7 million. Operating profit declined 17% year over year to $1.4 billion.

Operating income from equipment operations plunged 21% year over year to $1.13 billion due to lower shipment volumes, higher production costs and the unfavorable effects of foreign currency exchange.

Deere & Company - Earnings Surprise | FindTheBest

Segment Performance

The Agriculture & Turf segment sales decreased 11% year over year to $7 billion, as lower shipment volumes, sale of John Deere Landscapes and the unfavorable currency translation, partially offset price realization. Operating profit of the segment slumped 30% year over year to $941 million, also due to the above mentioned reasons.

Construction & Forestry sales improved 19% year over year to $1.75 billion, attributed to higher shipment volumes and price realization, partially offset by the unfavorable currency translation. Operating profit in the segment surged 81% year over year to $194 million, driven by higher shipment volumes and price realization, partially offset by a less favorable product mix.

Net revenues at Deere's Financial Services operations were $656 million in the reported quarter, up 12% year over year. The segment's operating profit was $249 million, compared with $234 million in the prior-year quarter. Net income in this segment was $162 million compared with $150 million in the year-ago quarter. The improvement stemmed from growth in credit portfolio, partially offset by higher provision for credit losses and higher selling, administrative and general expenses.

Financial Position

As of Jul 31, 2014, Deere had cash and cash equivalents of $3 billion, down from $3.1 billion as of Jul 31, 2013. Long-term borrowings were at $24 billion as of Jul 31, 2014 compared with $21.7 billion as of Jul 31, 2013. Cash flow from operating activities for the period of nine months ended Jul 31, 2014 was $682 million compared with $587.8 million in the year-ago period.

Looking Ahead

Deere expects equipment sales to decrease around 8% year over year for the fourth quarter of fiscal 2014. For the full year, Deere trimmed its forecast to a 6% drop from the previous expectation of a 4% dip. Deere also lowered its net income projection to $3.1 billion from $3.3 billion for fiscal 2014.

Segment-wise, Deere projects Agriculture and Turf equipment sales to decline 10% for fiscal 2014, down from the previous expectation of a 7% drop. This includes a negative currency translation effect of about 1%.

Region-wise, Deere expects that industry farm machinery sales in the U.S. and Canada will decline around 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 flat year over year. In South America, industry sales of tractors and combines are expected to decline by 15% year over year.

Deere expects sales growth of turf and utility equipment in the U.S. and Canada to range from flat to up 5%. 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 the 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 #3 (Hold). One of Deere's peers, Lindsay Corp. ( LNN ) reported a 36% year-over-year fall in earnings to $1.28 per share in third-quarter fiscal 2014, affected by lower crop prices and the elimination of enhanced Section 179 tax depreciation benefit. Earnings also lagged the Zacks Consensus Estimate of $1.39 per share.

Some stocks that are worth considering within this sector include Blount International Inc. ( BLT ) and Century Aluminum Co. ( CENX ), both carrying a Zacks Rank #1 (Strong 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 Nasdaq, Inc.


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

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