Deere’s EPS Misses, Revenue Beats (AGCO) (CNH) (DE)

Operational Update

Deere’s worldwide total sales increased 14% year over year to $9.79 billion, beating the Zacks Consensus Estimate of $8.84 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $9.05 billion, a 14% year-over-year increase including a price rise of 4% and an unfavorable currency translation effect of 3%. Region-wise, equipment net sales were up 26% in the United States and Canada, but decreased 2% in rest of the world.

Cost of sales in the quarter climbed 15% to $6.84 billion. Operating profit improved 8% year over year to $1.24 billion in the quarter.

Segment Performance

The Agriculture & Turf segment’s sales increased 16% to $7.39 billion, attributable to higher shipment volumes and improved price realization, partially offset by a negative currency translation. Operating profit of the segment improved 7% to $931 million. The increase in operating profit was based on higher shipment and improved price realization, partially offset by unfavorable effects of foreign currency exchange.

Construction & Forestry experienced a year-over-year sales improvement of 7% to $1.65 billion, ascribed to higher shipment volumes and improved price realization. The segment operating profit increased 38% year over year to $120 million, driven by higher shipment and improved price realization, partially offset by higher production and raw material costs along with higher Selling, General and Administrative and Research and Development expenses.

Net revenue at Deere’s Financial Services operations was $633 million in the reported quarter, up 3% year over year. Net income in this segment was $121.7 million, down from $122.1 million in the year-ago quarter. Results decreased year over year on higher SG&A expenses, narrow financial spreads, higher provision for credit losses and higher reserves for crop insurance claims.

Fiscal 2012 Performance

Deere reported earnings per share of $7.63 in fiscal 2012, up 15% from $6.63 per share a year ago. Earnings missed the Zacks Consensus Estimate of $7.76 per share. Total sales increased 13% year over year to $36.15 billion, beating the Zacks Consensus Estimate of $33.476 billion.

Financial Position

At the end of fiscal 2012, Deere had cash and cash equivalents of $4.65 billion, up from $3.65 billion as of fiscal 2011 end. Long-term borrowings increased to $22.4 billion at fiscal 2012 end from $16.9 billion at fiscal 2011 end. The company generated net cash flow from operating activities of $1.17 billion during fiscal 2012 compared with $2.236 billion in the prior fiscal.

Looking Forward

Deere expects equipment sales to grow around 10% in the first quarter of fiscal 2013 and 5% for the full year. Net income is projected at $3.2 billion for fiscal 2013.

Segment wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow 4% in fiscal 2013. Higher commodity prices and strong farm incomes are expected boost demand for farm machinery during the year. Furthermore, Deere’s sales are expected to benefit from global expansion and lines of advanced new equipment.

Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to remain flat year over year in 2013. In Europe, sales in projected to be down 5% due to continuing deterioration in the overall economy. Sales in the Commonwealth of Independent States are expected to witness modest growth.

Sales in Asia are expected to be flat compared with 2012, due to soft markets in China and India. In South America, industry sales are expected to be up 10% due favorable commodity prices. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be up 5%.

Construction and Forestry equipment are expected to improve 8% for 2013, driven by modest improvement in the U.S. economic conditions. World forestry markets are expected to remain flat year over year due to weakness in the European markets. Net income from Financial Services is estimated at around $500 million.

Our View

The company has invested in expanding its presence abroad, and has been building capacity in China, India, and Brazil and continued to roll out new products. Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong.

Recent figures suggest a turnaround in the construction sector. According to the American Institute of Architects, after languishing in the negative territory for five consecutive months, the architecture billing index (ABI) climbed back into the positive territory with a score of 50.2 in August. ABI is an economic indicator, which provides an approximate nine- to twelve-month glimpse into the future of non-residential construction spending activity and any score of above 50 is significant as it indicates an increase in billings.

In September, the score further improved to 51.6, the highest in nearly two years. Both housing starts and building permits were record high in four years. These figures are reflective of the fact that U.S. residential construction is finally stabilizing and is on the road to a much-awaited recovery. This, in turn, will improve demand for Deere’s construction equipment going forward. However, continued weakness in the European markets remains a concern.

Deere retains a Zacks #3 Rank (short-term Hold rating). 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. Deere competes with companies like AGCO Corporation (AGCO) and CNH Global NV (CNH),