Deere & Company (DE) Shares Up on Record Earnings

Shares of Deere & Company (DEAnalyst Report) went up 3.9% in pre-market trading session today as the company reported record net income for both the fourth quarter and fiscal 2013. Net income in the fourth quarter was $807 million, up 17% from $688 million in the prior-year quarter.

Fourth quarter earnings per share were reported at $2.11, up 21% from $1.75 per share earned in the prior-year quarter and way ahead of the Zacks Consensus Estimate of $1.89.

Operational Update

Deere’s worldwide total sales decreased 3% year over year to $9.45 billion, beating the Zacks Consensus Estimate of $8.8 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $8.6 billion, down 5% year over year, including a price rise of 4%, offset by a 2% unfavorable currency translation Region-wise, equipment net sales were down 6% in the U.S. and Canada and 2% in rest of the world.

Cost of sales in the quarter declined 7% year over year to $6.33 billion. Gross profit during the quarter was $3.12 billion compared with $2.95 billion in the prior-year quarter. Selling, administrative and general expenses remained flat at $948 million. Operating profit improved 10% year over year to $1.76 billion.

Operating income of equipment operations rose 6% year over year to $1.11 billion as price realization helped offset the unfavorable effects of foreign-currency exchange, lower shipment volumes and a less favorable product mix.

Segment Performance

The Agriculture & Turf segment sales decreased 4% year over year to $7.1 billion, attributable to lower shipment volumes and negative currency translation, which offset benefits of price realization. Operating profit of the segment improved 7% year over year to $996 million.

The increase in operating profit was driven by improved price realization, which offset unfavorable effects of foreign-currency exchange, a less favorable product mix and lower shipment volumes.

Construction & Forestry sales dropped 8% year over year to $1.52 billion, due to lower shipment volumes, partially offset by price realization. The segment operating profit fell 2% year over year to $118 million due to lower shipment, higher selling, administrative and general expenses, mostly offset by price realization and lower production costs.

Net revenues at Deere’s Financial Services operations were $699 million in the reported quarter, up 10% year over year. Net income in this segment was $157 million compared with $122 million in the year-ago quarter. The improvement stemmed from growth in the credit portfolio and higher crop insurance margins, partially offset by higher selling, administrative and general expenses.

Fiscal 2013 Performance

Deere reported earnings per share of $9.09 in fiscal 2013, up 19% from $7.63 in fiscal 2012 and above the Zacks Consensus Estimate of $8.86. Net income in fiscal 2013 was a record $3.5 billion compared with $3.1 billion in the prior fiscal. Revenues increased 5% to $37.8 billion, surpassing the Zacks Consensus Estimate of $35.3 billion.

Financial Position

As of Oct 31, 2013, Deere had cash and cash equivalents of $3.5 billion, down from $4.6 billion as of Oct 31, 2012. Long-term borrowings decreased to $21.6 billion as of Oct 31, 2013, from $22.4 billion as of Oct 31, 2012. Net cash flow provided by operating activities was $3.2 billion in fiscal 2013 compared with $1.17 billion in the prior year.

Looking Forward

Deere expects equipment sales to decrease around 2% year over year for the first quarter of fiscal 2014. For the full year, the company continues to expect 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. Even though USDA projects record net farm income for CY2013, farmer sentiment regarding capital goods purchases is becoming more conservative due to lower commodity prices. Deere will nevertheless benefit from recovery in construction sector. However, continued weakness in the 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 dealers for the resale of products internationally.

Deere currently holds a Zacks Rank #4 (Sell).

Stocks in the industrial products sector with a favorable Zacks Rank are Xylem Inc. (XYLAnalyst Report) with a Zacks Rank  #1, and Alamo Group, Inc. (ALGSnapshot Report) and H&E Equipment Services Inc. (HEESSnapshot Report), each with a Zacks Rank #2 (Buy).

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