Earnings Preview: Deere & Company
Deere & Company (DE) is scheduled to announce its fourth quarter and fiscal 2012 results on November 21, 2012. The current Zacks Consensus Estimate for the quarter is $1.88, reflecting a year-over-year growth of 16%.
The Zacks Consensus Estimate for the current fiscal stands at $7.76, an estimated annual growth of 17%. The Zacks Consensus revenue estimate is $8842 million for the quarter and $33.476 billion for fiscal 2012.
With respect to earnings surprise, Deere has outperformed the Zacks Consensus Estimate in three of the last four quarters. The average earnings surprise was 1.45%, implying that the company has surpassed the Zacks Consensus Estimate by the same magnitude over the same period.
Previous Quarter Recap
Deere’s third quarter fiscal 2012 earnings were $1.98 per share compared with $1.69 per share earned a year ago. Earnings missed the Zacks Consensus Estimate of $2.32 per share. Deere’s worldwide sales increased 15% year over year to $9.59 billion, beating the Zacks Consensus Estimate of $9.49 billion.
Looking Forward
Deere expects equipment sales to grow around 13%, down from 15% in fiscal 2012. The guidance includes an unfavorable currency-translation impact of 4% for the quarter and 3% for the year. Net income is projected at $3.1 billion, down from the previous expectation of $3.35 billion.
Segment-wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 13%, down from the previous guidance of 15% for full-year 2012, which includes a 4% negative impact of foreign currency translation.
Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow by more than 10% for 2012. While sales in Western and Central Europe are expected to be flat; sales in the Commonwealth of Independent States are expected to witness strong growth. Growth in Asia is expected to be down moderately due to soft markets in China and India.
In South America industry sales are expected to be down by 5%-10%, due to uncertainty and drought conditions prevailing in Argentina. Industry sales of turf and utility equipment in the U.S. and Canada are expected to be flat to up 5%, driven by drought conditions in the U.S.
Construction and Forestry equipment are expected to improve 17% for 2012, while world forestry markets would be flat year over year. Net income from Financial Services is estimated at $450 million, down from $465 million projected earlier.
Estimate Revision Trend
For the fourth quarter of fiscal 2012, of the 16 estimates available, two and one estimates have been revised upward in the last 30 days and 7 days, respectively. For the fiscal 2012, of the 18 estimates available for Deere, only one estimate has gone up in the past 30 days and in the past seven days. The lack of any major movement in estimates suggests the absence of any major catalyst driving the quarter’s results.
Magnitude of Estimate Revisions
The consensus earnings estimate for the fourth quarter of fiscal 2012 inched up a cent to $1.88 in last 7 days. Estimates also grew by a penny over the last 30 days. For fiscal 2012, there were no movement is estimates in the last 7 and 30 day period.
Our View
The United States Department of Agriculture forecasts net farm income to exceed $122 billion and net cash income is envisaged to go beyond $139 billion in 2012. These forecasts, if realized, represent all-time record levels.
Furthermore, 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.
Due to production hang-ups, delivery of some farm gear was delayed in the third quarter. This led to some farmers cancelling their orders as the equipment wouldn't have arrived before the harvest. Thus inventory levels increased and remain a headwind for the company in the fourth quarter.
However, margin expansion will be constrained in the next quarter given the increased costs for the Interim Tier 4 technologies and products, and higher research and development expenses. The new products introduced by Deere have to comply with the stringent engine emission regulations in North America and Europe. Deere expects the cost in fiscal 2012 to be $475 million higher than the fiscal 2011 levels, thereby, contracting margins.
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),
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