Deere & Company (DE) reported record first quarter fiscal 2013 earnings of $650 million or $1.65 per share compared with $533 million or $1.30 per share earned in the prior-year quarter. Reported earnings per share were well ahead of the Zacks Consensus Estimate of $1.41 per share.
Operational Update
Deere’s worldwide total sales increased 10% year over year to $7.42 billion, beating the Zacks Consensus Estimate of $6.72 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $6.79 billion, an 11% year-over-year increase including a price rise of 3% and an unfavorable currency translation effect of 1%. Region wise, equipment net sales were up 18% in the United States and Canada and 2% in rest of the world.
Cost of sales in the quarter climbed 10% to $5 billion. Operating profit improved 8% year over year to $1.27 billion in the quarter.
Segment Performance
The Agriculture & Turf segment’s sales increased 16% to $5.49 billion, attributable to higher shipment volumes and improved price realization, partially offset by a negative currency translation. Operating profit of the segment improved 33% to $766 million.
The increase in operating profit was based on higher shipment and improved price realization, partially offset by increases in selling, administrative and general expenses, warranty costs, production costs and research and development expenses.
Construction & Forestry experienced a 7% year-over-year decline in sales to $1.3 billion, due to lower shipment volumes. The segment operating profit plunged 43% year over year to $71 million, driven by lower shipment, higher production costs along with higher selling, general and administrative and research and development expenses, which offset the benefit from improved price realization.
Net revenue at Deere’s Financial Services operations was $527 million in the reported quarter, down 4% year over year. Net income in this segment was $133 million compared with $119 million in the year-ago quarter. The improvement stemmed from growth in the credit portfolio and higher crop insurance margins, partially offset by increased selling, administrative and general expenses
Financial Position
As of Jan 31, 2013, Deere had cash and cash equivalents of $3.67 billion, up from $3.39 billion as of Jan 31, 2012. Long-term borrowings increased to $22.2 billion as of Jan 31, 2013 from $16.9 billion as of Jan 31, 2012. The company used net cash flow for operating activities of $1.25 billion during the quarter compared with $1.23 billion in the prior-year quarter.
Looking Forward
Deere expects equipment sales to grow around 4% in the second quarter of fiscal 2013 and 6% for the full year. Net income is projected at $3.3 billion for fiscal 2013.
Segment wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow 6% in fiscal 2013. Higher commodity prices and strong farm incomes are expected boost demand for farm machinery during the year. Furthermore, Deere’s sales are expected to benefit from global expansion and lines of advanced new equipment.
Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to be flat to up 5% year over year in 2013. In Europe, sales in projected to be down 5% due to continued deterioration in the overall economy. Sales in the Commonwealth of Independent States are expected to witness a slight decline.
Sales in Asia are expected to be slightly higher on the back of strengthening Chinese economy. In South America, industry sales are expected to be up 10% to 15%. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat year over year.
Construction and Forestry equipment are expected to improve 3% for 2013, driven by modest improvement in the U.S. economic conditions and higher international sales of construction equipment. World forestry markets are expected to remain flat year over year due to weakness in the European markets. Net income from Financial Services is estimated at around $540 million.
Our View
The company has invested in expanding its presence abroad, and has been building capacity in China, India, and Brazil and continued to roll out new products. Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong.
Recent figures suggest that U.S. residential construction is finally stabilizing and is on the road to a much-awaited recovery. This, in turn, will improve demand for Deere’s construction equipment going forward. However, continued weakness in the European markets remains a concern.
Deere retains a short-term Zacks Rank #2 (Buy). 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 dealers for the resale of products internationally.
Other companies in the machinery-farming industry are AGCO Corporation (AGCO), CNH Global NV (CNH) and Lindsay Corporation (LNN).
