Deere Beats Q1 Earnings, Weak Farm Economy To Impact 2015

Shares of Deere & Company (DE - Analyst Report) went down 0.71% in pre-market trading as the company reported a 38% year-over-year decline in its first-quarter fiscal 2015 earnings per share to $1.12. This was due to lower demand for agricultural machinery and sluggish conditions in the global farm sector. Earnings, however, beat the Zacks Consensus Estimate of 83 cents, delivering an earnings surprise of 35%.

Deere & Company - Earnings Surprise | FindTheBest

Operational Update

Deere’s worldwide total sales dipped 17% year over year to $6.38 billion. However, revenues surpassed the Zacks Consensus Estimate of $5.43 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $5.6 billion, down 19% year over year, including a price realization of 1%, offset by a 2% unfavorable impact from currency translation. Region-wise, equipment net sales were down 14% in the U.S. and Canada, and 28% in rest of the world.

Cost of sales in the quarter decreased 15% year over year to $4.42 billion. Gross profit during the quarter was $1.96 billion, down 20% year over year. Selling, administrative and general expenses dipped 14% to $659 million. Operating profit declined 40% year over year to $647 million.

Operating income from equipment operations plunged 54% year over year to $414 million due to the impact of lower shipment volumes and a less favorable product mix, partially offset by lower selling, administrative and general expenses and price realization.

Segment Performance

The Agriculture & Turf segment sales decreased 27% year over year to $4.1 billion, as lower shipment volumes, sale of John Deere Landscapes and water operations and unfavorable currency translation partially offset price realization. Operating profit of the segment plunged 66% year over year to $268 million as lower shipment and less favorable product mix were partially offset by lower selling, administrative and general expenses and price realization.

Construction & Forestry sales improved 13% year over year to $1.52 billion aided by higher shipment volumes. Operating profit in the segment surged 55% year over year to $146 million, driven by higher shipment volumes, partially offset by higher sales-incentive costs and unfavorable effects of foreign-currency exchange.

Net revenues at Deere’s Financial Services operations were $648 million in the reported quarter, up 10% year over year. The segment’s operating profit was $233 million, compared with $182 million in the prior-year quarter. Net income in this segment was $157 million compared with $142 million in the year-ago quarter. The improvement stemmed from growth in credit portfolio and higher insurance margins, partially offset by less favorable financing spreads.

Financials

As of first-quarter fiscal 2015-end, Deere had cash and cash equivalents of $3.97 billion versus $3.79 billion as of fiscal 2014-end. As of the first-quarter end, long-term borrowings were $24.1 billion, compared with $24.4 billion as of fiscal 2014-end. Cash used in operating activities in the first quarter of fiscal 2015 were $510 million compared with $746 million in the year-ago quarter.

Looking Ahead

Deere expects equipment sales to decrease around 17% year over year in fiscal 2015, down from its previous expectation of a 15% decline. For the second quarter of 2015, the company projected a 19% decline in slaes compared with the year-ago period. Deere estimates its net income to be $1.8 billion for fiscal 2015, lower than its previous guidance of $1.9 billion. In spite of continued weakness in the global agricultural sector, John Deere hopes to remain solidly profitable in 2015.

Segment-wise, Deere estimated Agriculture and Turf equipment sales to decline 23% in fiscal 2015 due to lower commodity prices and falling farm incomes, which in turn has a negative impact on agricultural machinery demand.

Region-wise, industry farm machinery sales in the U.S. and Canada are expected to be down 25% to 30% for 2015. In Europe, sales are projected to be down 10% due to lower commodity prices and farm income as well as potential pressure on the dairy sector. In South America, industry sales of tractors and combines are expected to decline by 10% to 15% year over year due to economic uncertainty in Brazil.

Sales in the Commonwealth of Independent States are expected to deteriorate further, in part due to tight credit conditions and economic pressure. Sales in Asia are projected to be down slightly, with most of the decline centered in China and India. Deere expects sales growth of turf and utility equipment in the U.S. and Canada to range from flat to up 5%, benefiting from general economic growth.

The company foresees global sales for Construction & Forestry equipment to advance about 5% in 2015. The gain reflects further economic recovery and higher housing starts in the U.S. However, weakening conditions in the energy sector and energy-producing regions will continue to be a deterring factor. Global forestry sales are expected to hold steady with 2014 levels. Net income from Financial Services is estimated at around $630 million for the full year.

Our View

Agricultural equipment sales are expected to be lower due to weak farm income. Recently, USDA (U.S. Department of Agriculture) released its forecast for U.S. farm income in 2015 of $73.6 billion, the lowest since 2009 and a 32% drop from 2014. This is mainly because of falling crop prices such as corn and soybean, which in turn will affect farm income. This will restrain farmers from purchasing new agricultural equipment, thereby impacting Deere. However, Deere will benefit from the improvement in nonresidential construction sector as well as its cost cutting initiatives.

Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Global trends based on population growth and rising living standards remain intact and are largely unaffected by periodic swings in farming economy. Meanwhile, Deere's plans to serve a larger global customer base are making progress which will drive growth.

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 via branch offices as well as distributors and operates through dealers to resell products internationally.

One of Deere’s peers, AGCO Corp. (AGCO - Analyst Report) reported a 16% year-over-year decline in its fourth-quarter 2014 earnings to 1.18 per share. However, earnings surpassed the Zacks Consensus Estimate of 65 cents per share. Weaker markets caused significant production cuts, which, along with the negative effect of currency translation impacted growth. This, however, was partly offset by the company’s inventory reduction and expense saving program.

Deere currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks within this industry include Briggs & Stratton Corp. (BGG - Snapshot Report) and Kubota Corp. (KUBTY), both carrying a Zacks Rank #2 (Buy).