Deere & Company (DE) delivered earnings of $2.12 per share in its second quarter ended April 30, 2011, striding ahead of the Zacks Consensus Estimate of $2.06 and 34% above the $1.58 earned in the year-ago quarter. The outperformance was largely driven by a 25% increase in revenues fueled by strong demand for farm machinery coupled with improving conditions in construction and forestry markets.
The prior-year quarter’s EPS however excluded a tax charge of 30 cents due to enactment of Patient Protection and Affordable Care Act as amended by the Healthcare and Education Reconciliation Act of 2010. Including this, EPS in the said quarter stood at $1.28. When compared with this base-year figure, PS in the second quarter of fiscal 2011 posted a noticeable climb of 66%.
Revenue
Deere’s worldwide total sales increased 25% year over year to $8.91 billion, handily beating the Zacks Consensus Estimate of $8.46 billion. Net sales of equipment operations (which comprise Agriculture and Turf,
Construction and Forestry) were $8.32 billion, a 27% year-over-year increase including a favorable currency translation effect of 3% and a price realization of 4%. On a geographic basis, equipment net sales were up 17% in the United States and Canada and 45% in rest of the world.
Segment Performance
In terms of sales growth, Construction & Forestry continued to fare better with a year-over-year sales growth of 46% to reach $1.33 billion ascribed to higher shipment and production volumes and improved price realization.
The segment operating profit of $105 million posted an impressive increase of 192% from $36 million reported in the prior-year period. Benefits from the factors leading to revenue increase were somewhat offset by higher selling, administrative and general expenses and increased raw material costs.
The Agriculture & Turf segment followed with sales increasing 24% to $7 billion, led by higher shipment volumes, improved price realization and the favorable effects of currency translation. Operating profit at the segment was $1.16 billion, up 22% year over year.
The increase in operating profit resulted from higher shipment and production volumes and improved price realization, partially offset by higher raw material costs and dearer selling, administrative and general expenses.
Net revenues at Deere’s Financial Services operations were $491 million in the quarter, a 2% dip from the prior-year quarter. Net income in the segment however increased 21% year over year to $105 million. The improvement was largely driven by portfolio growth and a lower provision for credit losses.
Financial Position
As of April 30, 2011, Deere had cash and cash equivalents of $3.95 billion, up from $3.44 billion as of January 31, 2011 and $3.61 billion as of April 30, 2010. Long-term borrowings declined to $16.2 billion from $16.7 billion as of January 31, 2011 and from $17.4 billion as of April 30, 2010.
Net cash used in operating activities in the first six months of fiscal 2011 was $665.3 million compared with an inflow of $416.6 million in the year-ago period.
Looking Forward
Deere expects equipment sales to grow 20% in the third quarter and in the range of 21% to 23% for fiscal 2011 (up from the previous range of 18% to 21%). Guidance includes a favorable currency-translation impact of 6% for the third quarter and 3% for the fiscal year.
Net income is estimated to be $2.65 billion (up from the previous guidance of $2.5 billion) in 2011. It is to be noted that the 2011 expectations include a negative impact of approximately $300 million in sales and $70 million in operating profit resulting from the recent Japanese earthquake and tsunami.
Segment wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 20% for full year 2011, benefiting from favorable global farm conditions and a positive currency translation impact of about 4%. Construction and Forestry equipment sales are expected to improve 35% for 2011, reflecting improved market conditions compared with the lows seen in the prior year and increased activity outside the U.S. and Canada.
Construction equipment sales to independent rental companies are seeing growth, while world forestry markets are experiencing further improvement on the back of strong wood and pulp prices. Net income from Financial Services is estimated to be $435 million, reflecting continued growth in the portfolio and a lower provision for credit losses.
Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow in the range of 5% to 10% for 2011. Western and Central Europe is expected to increase 15%, while sales in the Commonwealth of Independent States are expected to witness stronger gains compared with depressed levels seen last year. In South America, the company expects industry sales to be down 5% to 10% from the strong levels of 2010 due to weakness in the small tractor market in Brazil and recently enacted trade policies in Argentina.
Our Take
The United States Department of Agriculture forecasts net farm income to reach $94.7 billion in 2011, up nearly 20% compared with 2010, the second highest inflation-adjusted value for net farm income in the past 37 years. This will drive farmers to invest in the latest machinery to maximize productivity, which in its turn would benefit the company.
Deere’s consistent investment in new products and expanded global capacity place the company on a solid footing for the future. Given increased global demand for food, shelter and infrastructure, we believe the long-term outlook for Deere remains strong. 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).
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