Deere & Co. (DE) delivered earnings of $2.61 per share in its second quarter of fiscal 2012, comfortably exceeding the Zacks Consensus Estimate of $2.54. Results were 23% above the $2.12 earned in the year-ago quarter.
The outperformance was largely driven by a strong demand for farm machinery, the launch of advanced new products and geographic expansion.
Operational Update
Deere’s worldwide total sales increased 12% year over year to $10 billion, beating the Zacks Consensus Estimate of $9.67 billion.
Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $9.4 billion, a 13% year-over-year increase including a price increase of 5% and an unfavorable currency translation effect of 2%. On a geographic basis, equipment net sales were up 18% in the United States and Canada and, 6% in rest of the world.
Cost of sales in the quarter totaled $6.8 billion, up 12% year over year. Operating profit improved 16% year over year to $1.94 billion in the quarter.
Segment Performance
The Agriculture & Turf segment’s sales increased 11% to $7.7 billion, led by higher shipment volumes and improved price realization. Operating profit at the segment was $1.4 billion, up 21% year over year. The increase in operating profit resulted from higher shipment, improved price realization, partially offset by higher raw material costs and, research and development expenses.
Construction & Forestry posted year-over-year sales growth of 26% to reach $1.67 billion, ascribed to higher shipment volumes and improved price realization. The segment operating profit increased 13% year over year to $119 million, driven by higher shipment, production volumes and improved price realization, partially offset by higher raw material costs and unfavorable product mix.
Net revenues at Deere’s Financial Services operations were $488 million in the reported quarter, down 1% from the year-ago quarter. Net income in the segment was $109 million, up from $105 million in the year-ago quarter. Benefits from growth in credit portfolio were offset by higher selling, administrative and general expenses.
Financial Position
As of March 31, 2012, Deere had cash and cash equivalents of $3.02 billion, down from $3.39 billion as of January 31, 2012 and $3.95 billion as of March 31, 2011. Long-term borrowings increased to $18.7 billion as of March 31, 2012 from $16.92 billion as of January 31, 2012 and $16.2 billion as of April 31, 2011. Net cash used for operating activities for the first half of fiscal 2012 was $1.53 billion compared with $665.3 million in the corresponding prior-year period.
Looking Forward
Deere expects equipment sales to grow around 15% in fiscal 2012. The guidance includes an unfavorable currency-translation impact of 3%. Net income is projected at $3.35 billion, up from the previous expectation of $3.275 billion.
Segment-wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 15% for full-year 2012, benefiting from the favorable global farm conditions, introduction of advanced new products throughout the globe and from major expansion projects particularly in the emerging markets.
Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow by 10% for 2012. While sales in Western and Central Europe are expected to be flat to up 5%, sales in the Commonwealth of Independent States are expected to witness strong growth. Asian growth is expected to be moderate. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be up 5%.
Construction and Forestry equipment are expected to improve 20% for 2012. This reflects strength in the rental, energy, material-handling, industrial and international sectors and growth in sales to independent rental companies, which are upgrading and replenishing their fleets.
Sales growth is also expected to be aided by advanced new products and geographic expansion. Net income from Financial Services is estimated at $465 million.
Our Take
Deere is riding a wave of strong demand for agricultural commodities and increase in farm income globally. The United States Department of Agriculture forecasts net farm income to be at $91.7 billion in 2012. It is expecting a record corn crop of 48 million tons this year, up 4.5 million tons year on year, which will be the largest yield in the last 75 years.
This bullish trend will be witnessed worldwide, as the global corn production is estimated to rise 10% with several countries posting record yields. This will encourage farmers to invest in the latest machinery to maximize productivity, favoring Deere and other companies in this space.
Deere’s sales will also be supported by launch of a range of advanced new products and by geographic expansion. Deere has been growing its manufacturing footprint in overseas markets such as China, Brazil, Russia and India.
The expansion into the emerging markets should provide long-term growth opportunities. Population growth and rising living standards in the emerging markets are fueling growth in global food demand.
In addition, Deere is also increasing its focus in the U.S. and Canada. This area generated nearly 60% of total revenues and about 75% of the company’s profit in 2011.
The company currently retains a Zacks #2 Rank (short-term Buy recommendation).
Illinois-based Deere & Co. 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 dealers for the resale of products internationally. Deere competes with Caterpillar Inc. (CAT), CNH Global NV (CNH) and Kubota Corporation (KUB).
