Shares of Deere & Company (DE) went up 2.8% during the pre-market trading session today, Feb 12, as the company reported record net income for the first quarter of fiscal 2014 (ended Jan 31, 2014). Net income in the quarter was $681 million, up 5% from $650 million in the prior-year quarter. Despite moderate demand from farmers for Deere tractors, harvesters and other agricultural machinery due to lower commodity prices, Deere’s incessant efforts to cut down costs led to the improvement in earnings.
First-quarter earnings per share were reported at $1.81, up 10% from $1.65 per share earned in the prior-year quarter and way ahead of the Zacks Consensus Estimate of $1.51. Deere delivered a solid earnings surprise of +20% in the quarter.
Operational Update
Deere’s worldwide total sales increased 3% year over year to $7.65 billion, way ahead of the Zacks Consensus Estimate of $6.5 billion. Net sales of equipment operations (which comprise of Agriculture and Turf, Construction and Forestry) were $6.9 billion, up 2% year over year, including a price rise of 2%, offset by a 2% unfavorable currency translation. Region-wise, equipment net sales were up 3% in the U.S. and Canada and 2% in rest of the world.
Cost of sales in the quarter increased 4% year over year to $5.2 billion. Gross profit during the quarter was $2.46 billion, up 2% year over year. Selling, administrative and general expenses dipped 2% to $766 million. Operating profit improved 8% year over year to $1.37 billion.
Operating income from equipment operations rose 6% year over year to $891 million as price realization helped offset unfavorable effects of foreign-currency exchange and a less-favorable product mix.
Segment Performance
The Agriculture & Turf segment sales increased 2% year over year to $5.6 billion, attributable to benefits of price realization and higher shipment volumes offset by negative currency translation. Operating profit of the segment improved 4% year over year to $797 million. The increase in operating profit was driven by improved price realization, which offset unfavorable effects of foreign-currency exchange and a less-favorable product mix.
Construction & Forestry sales improved 4% year over year to $1.35 billion. Operating profit in the segment surged 32% year over year to $94 million, driven by lower production costs, lower research and development expenses and price realization. However, lower production volumes were a minor deterrent.
Net revenues at Deere’s Financial Services operations were $587 million in the reported quarter, up 11% year over year. The segment’s operating profit was $182 million, compared with $197 million in the prior-year quarter. Net income in this segment was $142 million compared with $133 million in the year-ago quarter. The improvement stemmed from growth in credit portfolio and favorable effective tax rate, partially offset by higher selling, administrative and general expenses, lower crop insurance margins and less-favorable financing spreads.
Financial Position
As of Jan 31, 2014, Deere had cash and cash equivalents of $3.2 billion, down from $3.5 billion as of Oct 31, 2013 and $3.7 billion as of Jan 31, 2013. Long-term borrowings were at $22 billion as of Jan 31, 2014 compared with $21.6 billion as of Oct 31, 2013 and $22.2 billion as of Jan 31, 2013. Net cash flow used in operating activities was $746 million in the quarter compared with $1.2 billion in the prior-year quarter.
Looking Ahead
Deere expects equipment sales to decrease around 2% year over year for the second quarter of fiscal 2014. For the full year, the company expects equipment sales to decline 3%. Deere projects net income of $3.3 billion for fiscal 2014.
Segment-wise, Deere projects Agriculture and Turf equipment sales to decline 6% for fiscal 2014. Even though commodity prices and farm incomes are expected to remain at healthy levels in 2014, they will be lower than 2013, which will have a dampening effect on demand for large farm equipment.
Region-wise, Deere expects that industry farm machinery sales in the U.S. and Canada will decline 5% to 10% year over year in fiscal 2014. In Europe, sales are projected to be down 5% due to continued deterioration in the overall economy, lower commodity prices and farm incomes.
Sales in the Commonwealth of Independent States are expected to be moderately lower. Sales in Asia are expected to be up slightly year over year. Deere expects sales growth of turf and utility equipment in the U.S. and Canada to be about 5%, reflecting improved market conditions.
The company foresees global sales for Construction & Forestry equipment to advance about 10%, partly because of the recovery in the U.S. economy and an increase in housing starts. Global forestry sales are expected to be higher, driven by economic growth and higher sales in European markets. Net income from Financial Services is estimated at around $600 million.
Our View
Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Meanwhile in the near term, even though net farm income remains at high levels, farmer sentiment regarding capital goods purchases is becoming more conservative due to lower commodity prices.
Deere will nevertheless benefit from recovery in the construction sector. Furthermore, given its strong balance sheet, the company can continue to increase dividends and repurchase shares. However, continued weakness in European markets remains a concern.
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 operated through dealers for the resale of products internationally.
Deere currently holds a Zacks Rank #4 (Sell). Some better-ranked stocks in the machinery sector include Xylem Inc. (XYL), Altra Industrial Motion Corp. (AIMC) and Barnes Group Inc. (B), all of which carry a Zacks Rank #2 (Buy).
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