Deere Beats Estimates, Lowers Outlook
For the most recent quarter ended July 31, Deere & Co. (NYSE: DE – $84.56) reported a net profit of $850.7 million, or $2.33 a share, compared with $996.5 million, or $2.56 a share, a year earlier. Sales fell 5% to $9.5 billion. Analysts had predicted on average that DE would earn $2.21 per share on revenue of $9.0 billion. Third-quarter farm-equipment sales fell 11% from a year ago to $6.97 billion, while operating profit from the farm business plunged 30% to $941 million. Deere’s construction and forestry equipment unit helped offset some of the decline in the farm business as sales rose 19% from year ago to $1.75 billion. Operating profit in C&F soared 81% to $194 million, helped by higher equipment prices. The company, however, cut its full year outlook as declining grain prices discouraged farmers from purchasing its ag equipment. The Moline, Illinois-based company, the world’s largest maker of farm equipment, said it now expects to earn $3.1 billion in fiscal 2014, down from its previous forecast of $3.3 billion. The company is forecasting total U.S. farm cash receipts, which correlate closely with investment in new farm machinery, to fall to $387.1 billion in 2014, down from $407.1 billion in 2013 and below its previous forecast of $392.7 billion. In an effort to align costs with projected revenue, Deere said that it will reduce the size of its manufacturing workforce at some agricultural-equipment factories in response to current market demand for its products. The action will place more than 600 employees at four locations on “indefinite layoff”. Additionally, the company is implementing seasonal and inventory adjustment shutdowns and temporary layoffs at several of the affected factories. I continue to expect top and bottom line moderation for the company through 2015, as agricultural machinery is a highly cyclical business and the outlook for key farm commodity prices and planted crop acreage yields remain low along with uncertain government policies. Contributing to the softness is Deere’s exposure to Russia and the Ukraine. Nonetheless, much of the negative news is already factored into the shares and over the long-term, Deere, yielding 2.8%, offers decent total return potential for the conservative investor.