Deere Posts Strong Results; Guidance Improves

DE Shares of Deere & Co. (NYSE: DE $103.89) are trading sharply higher after the agricultural equipment maker beat fiscal fourth-quarter expectations. Despite an unfavorable operating backdrop, marked by the negative effects of low commodity prices on demand for farm machinery, the iconic company reported revenues of $5.65 billion. While this was a nearly 5% year-over-year decline, analysts expected a steeper fall to about $5.43 billion. Sales of the company’s farm and landscaping machinery fell 5% during the fourth quarter from the same period a year earlier to $4.44 billion, but profit from the business surged 37%.  Lower shipments remained an area of weakness, but higher prices provided some support. Deere’s construction-machinery business continued to struggle during the fourth quarter, losing $17 million as sales slipped 5% to $1.21 billion. Management’s execution of a wide-ranging cost-reduction program led to share earnings of $0.90, down from $1.08 a year ago, but eclipsed the consensus $0.40 estimate.

       While the worst of the sector’s cyclical decline appears to be over, the recovery is apt to be slow. Several years of bumper harvests and high tractor inventories point to another year of lower ag machinery sales by approximatley 1%.  Additional savings, however, are probable along with potential growth in South America and a better outlook for construction equipment. For fiscal 2017, earnings are expected at about $4.24 per share as compared to 2016’s $4.81. Shares, up 37% over the past twelve months, can continue to be held in a well-diversified conservative portfolio.
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