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Deere Reports Record 2Q Earnings

Zacks Equity Research

Driven by higher sales of farm machinery, Deere & Company (DE) reported record second quarter fiscal 2013 earnings of $1.08 billion or $2.76 per share compared with $1.056 billion or $2.61 per share earned in the prior-year quarter. Reported earnings per share were ahead of the Zacks Consensus Estimate of $2.74 per share.

Operational Update

Deere’s worldwide total sales increased 9% year over year to $10.9 billion, beating the Zacks Consensus Estimate of $9.8 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $10.3 billion, a 9% year-over-year increase including a price rise of 3% offset by an unfavorable currency translation effect of 2%. Region-wise, equipment net sales were up 9% in the United States and Canada and 9% in rest of the world.

Cost of sales in the quarter climbed 9% to $7.48 billion. Selling, administrative and general expenses increased 8% to $956 million. Operating profit improved 8% year over year to $2.1 billion in the quarter.

Operating income of equipment operations increased 9% to $1.66 billion as price realization, lower raw material costs and higher shipment volumes helped offset increased production costs and higher selling, administrative and general expenses and unfavorable effects of foreign-currency exchange.

Segment Performance

The Agriculture & Turf segment sales increased 12% to $8.69 billion, attributable to higher shipment volumes and improved price realization, partially offset by a negative currency translation. Operating profit of the segment improved 13% to $1.58 million.

The increase in operating profit was based on higher shipment and improved price realization, partially offset by increases in selling, general and administrative expenses, production costs as well as unfavorable effects of foreign exchange.

Construction & Forestry experienced a 6% year-over-year decline in sales to $1.57 billion, due to lower shipment volumes. The segment operating profit plunged 32% year over year to $81 million, driven by lower shipment, higher production costs along with higher selling, general and administrative and research and development expenses, which offset the benefit from improved price realization.

Net revenue at Deere’s Financial Services operations was $536 million in the reported quarter, up 10% year over year. Net income in this segment was $125 million compared with $109 million in the year-ago quarter. The improvement stemmed from growth in the credit portfolio and higher crop insurance margins, partially offset by increased selling, administrative and general expenses.

Financial Position

As of Apr 30, 2013, Deere had cash and cash equivalents of $3.65 billion, up from $3.02 billion as of Apr 30, 2012. Long-term borrowings increased to $21.7 billion as of Apr 30, 2013 from $18.7 billion as of Apr 30, 2012. The company used net cash flow for operating activities of $1.16 billion during the first half of fiscal 2013 compared with $1.53 billion in the prior-year comparable period.

Looking Forward

Deere expects equipment sales to grow around 3% in the third quarter of fiscal 2013 and 5% for the full year. Net income is projected at $3.3 billion for fiscal 2013.

Segment-wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow 7% 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 new lines of advanced equipment.

Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to increase 5% year over year in 2013. In Europe, sales are projected to be down 5% due to continued deterioration in the overall economy and the poor harvest in the U.K. last year.

Sales in the Commonwealth of Independent States are expected to witness a slight decline. Sales in Asia are expected to be flat year-over-year. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat-to-down slightly year-over-year due to cool, wet spring in North America and reflecting a cautious consumer outlook.
Construction & Forestry equipment are expected to decline 5% in 2013, driven by cool, wet weather conditions in North America, flat sales in world forestry markets and reflecting a cautious outlook for U.S. economic growth. Weakness in the European markets will continue to affect the forestry markets. Net income from Financial Services is estimated at around $550 million.

Our View

Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Deere will benefit from relatively high commodity prices and strong farm incomes, recovery in construction sector and strength in Brazil.

However, continued weakness in the European markets, additional import duty imposed in Russia, Kazakhstan and Belarus, margin headwinds which include higher production costs associated with interim Tier 4 as well as global growth expenses remain concerns.

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 #3 (Hold). Other stocks in the industrial products sector with a favorable Zacks Rank are Alamo Group, Inc. (ALG), AO Smith Corp. (AOS) and CNH Global NV (CNH) with a Zacks Rank #2 (Buy)

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