Deere & Company’s (DE) earnings per share in the fourth quarter of fiscal 2014 (ended Oct 31, 2014) declined 13.3% to $1.83 from $2.11 earned in the prior-year quarter impacted by less favorable product mix, lower shipment and production volumes and higher production costs. Earnings, however, beat the Zacks Consensus Estimate of $1.58, delivering an earnings surprise of 15.8%.
Operational Update
Deere’s worldwide total sales dipped 5% year over year to $8.97 billion. However, revenues surpassed the Zacks Consensus Estimate of $7.76 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $8 billion, down 7% year over year, including a price realization of 1%, offset by a 1% unfavorable impact from currency translation. Region-wise, equipment net sales were down 10% in the U.S. and Canada, and 2% in rest of the world.
Cost of sales in the quarter decreased 3.7% year over year to $6.1 billion. Gross profit during the quarter was $2.87 billion, down 8% year over year. Selling, administrative and general expenses dipped 10% to $851 million. Operating profit declined 14% year over year to $1.17 billion.
Operating income from equipment operations plunged 18% year over year to $910 million due to less favorable product mix, lower shipment and production volumes and higher production costs.
Segment Performance
The Agriculture & Turf segment sales decreased 13% year over year to $6.2 billion, as lower shipment volumes, sale of John Deere Landscapes and water operations and unfavorable currency translation partially offset price realization. Operating profit of the segment slumped 32% year over year to $682 million due to lower shipment and production volumes, less favorable product mix, higher production costs primarily related to engine emission programs, increased warranty costs and an impairment charge for Chinese operations.
Construction & Forestry sales improved 23% year over year to $1.87 billion aided by higher shipment volumes and price realization, partially offset by unfavorable currency translation. Operating profit in the segment surged 93% year over year to $228 million, driven by higher shipment volumes and lower selling, administrative and general expenses.
Net revenues at Deere’s Financial Services operations were $762 million in the reported quarter, up 9% year over year. The segment’s operating profit was $261 million, compared with $241 million in the prior-year quarter. Net income in this segment was $172 million compared with $157 million in the year-ago quarter. The improvement stemmed from growth in credit portfolio, partially offset by lower crop insurance margin, higher provision for credit losses and higher selling, administrative and general expenses.
Fiscal 2014 Performance
Deere posted earnings of $8.63 per share for fiscal 2014, down 5.1% from $9.09 a share in fiscal 2013. However, it came ahead of the Zacks Consensus Estimate of $8.38. Revenues for the full year decreased 5% year over year to $36.07 billion. However, it surpassed the Zacks Consensus Estimate of $33.07 billion. Weaker conditions in the global farming sector caused sales and earnings to decline in fiscal 2014 from the record results of 2013.
Financials
As of Oct 31, 2014, Deere had cash and cash equivalents of $3.8 billion versus $3.5 billion as of Oct 31, 2013. As of Oct 31, 2014, long-term borrowings were $24.4 million, compared with $21.6 billion as of Oct 31, 2013.
Cash from operations for the twelve-month period ended Oct 31, 2014, were $3.53 billion, up 8% from $3.25 billion in the year-ago comparable period. Dividends and buybacks in 2014 totaled a record $3.5 billion.
Looking Ahead
In spite of continued pullback in the global agricultural sector John Deere expects to remain solidly profitable in 2015, reflecting its efforts to establish a more resilient business model.
Deere expects equipment sales to decrease around 15% year over year in fiscal 2015. For the first quarter of 2015, Deere projected a 21% decline compared with the year-ago period. Deere projected its net income to be $1.9 billion for fiscal 2015.
Segment-wise, Deere estimated Agriculture and Turf equipment sales to decline 20% for fiscal 2015 as a result of weaker conditions in the global farming economy.
Region-wise, industry farm machinery sales in the U.S. and Canada are expected to be to be down 25 to 30% for 2015. In Europe, sales are projected to be down 10% due to lower commodity prices and farm income as well as potential pressure on the dairy sector. Sales in the Commonwealth of Independent States are expected to deteriorate further, in part due to tight credit conditions. Sales in Asia are projected to be down slightly, with most of the decline centered in China. In South America, industry sales of tractors and combines are expected to decline by 10% year over year due to headwinds affecting agricultural producers.
Deere expects sales growth of turf and utility equipment in the U.S. and Canada to range from flat to up 5% benefiting from general economic growth. The company foresees global sales for Construction & Forestry equipment to advance about 5% for 2015. The gain reflects further economic recovery and higher housing starts in the U.S. as well as sales increases outside the U.S. and Canada. Global forestry sales are expected to hold steady with the attractive levels of 2014. Net income from Financial Services is estimated at around $610 million for the full year.
Our View
Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Global trends based on population growth and rising living standards remain intact and are largely unaffected by periodic swings in the farming economy. Meanwhile Deere's plans for serving a larger global customer base are making progress which will drive growth.
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 operates through dealers to resell products internationally.
Deere currently holds a Zacks Rank #4 (Sell).
One of Deere’s peers, Lindsay Corporation (LNN) reported a 10% year-over-year rise in earnings to 89 cents per share in the fourth-quarter fiscal 2014. Earnings also beat the Zacks Consensus Estimate of 56 cents per share.
Some stocks that are worth considering within this industry include Alamo Group, Inc. (ALG) and Briggs & Stratton Corporation (BGG), both carrying a Zacks Rank #1 (Strong Buy).
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