The Rising Influence of Rising Affluence

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Deere Logs Solid FY3Q10 Results

http://finance.yahoo.com/news/Deere-3Q-profit-up-47-pct-on-apf-3631656907.html?x=0&.v=7

›August 18, 2010, 3:29 pm

Deere & Co. said Wednesday its third-quarter profit grew 47 percent because American and Canadian farmers bought enough of the company's large equipment to offset a sharp downturn in Europe, but Deere kept its forecast for the year conservative.

The company reported $617 million in net income, or $1.44 per share, in the quarter that ended July 31. That's up from $420 million, or 99 cents per share, a year ago.

Deere says global revenue spiked 16 percent to $6.84 billion.

Agricultural equipment sales in the U.S. and Canadian markets increased 19 percent in the quarter. Sales in other markets rose 16 percent, but that figure masks the European weakness.

"While we have benefited from positive conditions in the U.S. farm sector, particularly in terms of demand for large equipment, European markets are down sharply," Deere's Chairman and CEO Samuel Allen said in a statement.

European dairies and livestock producers are still recovering from losses of prior years, and rising crop prices will create new worries about feed costs for those businesses. And in eastern Europe and Russia, drought conditions and wildfires have hurt farmers. Deere officials also said used inventories remain at high levels in Europe, so sales of new equipment has been hurt.

Edward Jones analyst Jeff Windau said the weakness in Europe hurt Deere's results, but other markets are more important to the company in the long run.

"The real growth is happening more in South America and the emerging markets," [no kidding] Windau said.

Allen said Deere is performing well despite some challenging conditions. Deere's agricultural and turf equipment sales grew 12 percent in the quarter to $5.2 billion from last year's $4.7 billion. [The Ag & Turf segment comprises about 80% of DE’s overall business; construction & forestry equipment and the captive finance subsidiary provide the rest.]

Demand for construction and forestry equipment has improved from last year, but Deere said it remains well below normal. Quarterly sales for that division jumped 59 percent [from a very low 2Q09 base] to just over $1 billion from $632 million a year ago.

The quarterly results from the maker of iconic green-and-yellow farm and construction equipment easily beat Wall Street expectations. On average, analysts surveyed by Thomson Reuters expected earnings per share of $1.24 on $6.52 billion revenue.

Analysts praised Deere's performance, but were soured by the company's expectations going forward. Deere stock fell $1.17, or 1.7 percent, to $66.06 in afternoon trading Wednesday.

Sterne Agee analyst Lawrence De Maria said in a research note that Deere's guidance appeared conservative after the past two quarters of solid results. [I strongly agree.]

"We believe the underlying fundamentals for ag are exceptional, and anticipate continued strong operating performance and another solid year in 2011," De Maria said.

Jefferies & Co. analyst Stephen Volkmann said in a research note that Deere delivered a strong performance, but investors may be disappointed with the company's fourth-quarter forecast.

The company said it now expects its sales to grow about 12 percent in fiscal 2010. That prediction is in line with the 11 percent to 13 percent range Deere offered in May.

Deere also said it expects fourth-quarter net income to increase about 32 percent over last year to $375 million. Deere officials said fourth-quarter results will be hurt by higher incentive compensation and higher costs related to the company's efforts to comply with new emissions regulations that start to take effect in 2011. [the so-called interim Tier 4 standard]. Deere expects higher research and development costs in the fourth quarter and additional costs for upgrading its plants to produce the new equipment. Plus, raw materials costs are expected to increase in the fourth quarter.

Windau said even with the challenges Deere faces, he believes the company's fourth-quarter results may beat its cautious outlook.

Deere said it expects U.S. farm income this year to total $85.7 billion. That's up from the company's previous forecast of $81.5 billion. The amount of money farmers have is a key indicator of how much equipment Deere will sell.‹