We reiterate our Neutral recommendation on Deere & Company (DE), following its mixed results in third quarter fiscal 2012. The company’s third quarter earnings of $1.98 per share missed the Zacks Consensus Estimate of $2.32. Revenues increased 15% year over year to $9.59 billion, beating the Zacks Consensus Estimate of $9.49 billion.
The United States Department of Agriculture forecasts net farm income to exceed $122 billion and net cash income is envisaged to go beyond $139 billion in 2012. Owing to an early harvest in the U.S., corn production stabilized.
Thus, it became clear that though the drought has hampered corn production to some extent, it had not destroyed the crop this year. The farmers are investing in the latest machinery to maximize productivity, favoring Deere in this space.
The Architecture Billing Index of American Institute of Architects became positive in August after remaining in the negative territory for four consecutive months since April. The index increased 1.5 points from July to 50.2 in August 2012. Any reading above 50 indicates an increase in demand for architect’s services.
Moreover, the new projects inquiry index was 57.2 in August, up from 56.3 in July. In addition, the new highway bill will also improve demand for construction equipment in the U.S. market. This, in turn, will improve demand for Deere’s construction equipment going forward.
However, margin expansion will be constrained in the next quarter given the increased costs for the Interim Tier 4 technologies and products, and higher research and development expenses. The new products introduced by Deere have to comply with the stringent engine emission regulations in North America and Europe. Deere expects the cost in fiscal 2012 to be $475 million higher than the fiscal 2011 levels, thereby, contracting margins.
Moreover, inventory levels increased in the third quarter due to order cancellations from dealers. In certain areas harvesting was done early during the quarter but Deere failed to dispatch supplies in time. Therefore, increased level of inventories remains a headwind for the company in the next quarter.
Deere retains a short-term Zacks #5 Rank (Strong Sell). Illinois-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.
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