Deere & Co. (DE) delivered earnings of $1.69 per share in its third quarter ended July 31, 2011, comfortably exceeding the Zacks Consensus Estimate of $1.68. Results were 17% ahead of $1.44 earned in the year-ago quarter. Net income improved 15% from the year-ago quarter to $712.3 million in third quarter of 2011.
The outperformance was largely driven by strong demand for farm machinery, increased sales of construction equipment and effective cost management.
Operational Update
Deere’s worldwide total sales increased 22% year over year to $8.4 billion, beating the Zacks Consensus Estimate of $7.7 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $6.4 billion, a 22% year-over-year increase including a favorable currency translation effect of 6% and a price increase of 3%. On a geographic basis, equipment net sales were up 10% in the United States and Canada and 49% in rest of the world.
Cost of sales in the quarter totaled $5.79 billion, up 28% year over year.
Operating profit improved 12% year over year to $1.16 billion in the quarter.
Segment Performance
In terms of sales growth, Agriculture & Turf fared better, increasing 34% to $1.35 billion, led by higher shipment volumes and improved price realization. Operating profit at the segment was $110 million, up 67% 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 selling, administrative and general (SG&A) expenses.
Construction & Forestry followed with a year over year sales growth of 22% to reach $6.37 billion ascribed to higher shipment, favorable foreign currency translation and better price realization. The segment operating profit increased 4% year over year to $859 million driven by higher shipment and improved price realization, partially offset by higher raw material costs and SG&A expenses.
Net revenues at Deere’s Financial Services operations were $550 million in the quarter, up by a modest 4% over the year-ago quarter. Net income in the segment was $125.6 million, up 23% from the year-ago quarter. The improvement was largely driven by portfolio growth and a lower provision for credit losses.
Financial Position
As of July 31, 2011, Deere had cash and cash equivalents of $3.62 billion, down from $3.75 billion as of July 31, 2010. Long-term borrowings declined to $15.89 billion from $16.37 billion as of July 31, 2010.
Net cash from operating activities for the nine months was $636.1 million compared with $1.088 billion in the year-ago period.
Looking Forward
Deere expects equipment sales to grow 20% in the fourth quarter and about 25% for fiscal 2011. Guidance includes a favorable currency-translation impact of 4% for both fourth quarter and fiscal year.
Full year guidance includes an adverse effect of about $70 million in sales and $10 million in operating profit due to the Japanese earthquake and tsunami.
Net income is estimated at $2.7 billion in 2011.
Segment wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 21% for full-year 2011, benefiting from favorable global farm conditions. Construction and Forestry equipment are expected to improve 45% for 2011.
Net income from Financial Services is estimated at $460 million, reflecting continued growth in the portfolio.
Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow 5% to 10% for 2011. Western and Central Europe is expected to increase 10% to 15% while sales in the Commonwealth of Independent States are expected to see moderate gains. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat compared to the 2010 level.
However, In South America, the company expects industry sales to decline 5% over 2010.
Peer Comparison
Deere's competitor Caterpillar Inc. (CAT) delivered second quarter adjusted earnings of $1.72, lagging the Zacks Consensus Estimate of $1.77. Earnings surged 58% from $1.09 earned in the year-ago quarter.
Our Take
Deere continues to remain focused on expanding its production capacities. The company’s investments to expand capacities as well as to offer new products favorably position it to cater to the increasing demand for food, shelter and infrastructure, thereby fueling topline growth in the upcoming quarters. Deere also pays a regular quarterly dividend and increases the dividend from time to time, which enhances shareholders value.
The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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