The Rising Influence of Rising Affluence

[DewDiligence]

Deere Posts Blowout FY4Q10 Profit, Gives ‘Tepid’ FY2011 Guidance

[I put the word “tepid” in quotation marks because, objectively, DE’s guidance for full-year FY2011 (ending 10/31/11) is quite strong: revenue growth of 10-12% and profit growth of 13%, which translates into an implicit FY2011 GAAP and non-GAAP EPS forecast of $4.92. The main reason FY2011 guidance is not better is the so-called “Tier 4” requirement for cleaner emissions from off-road vehicles, which goes into effect in calendar 2011 for DE’s larger tractors and combines and will cause some curtailment in production during model changeovers.

DE has a history of giving conservative guidance and then beating it handily, so the chances are good that FY2011 will be more profitable than DE is letting on. If DE merely meets its conservative FY2011 guidance, the current share price represents a forward P/E of about 15; in the more likely event that DE beats its FY2011 guidance with an EPS of, say, $5.40, the current share price represents a forward P/E of about 14. This is hardly an expensive valuation for the world’s premiere ag-equipment company and a major beneficiary of The Global Demographic Tailwind.

DE’s own FY4Q10 PR is at http://www.deere.com/en_US/ir/financialdata/2010/fourthqtr10.html .]

http://online.wsj.com/article/SB10001424052748703572404575634400693959476.html

›NOVEMBER 24, 2010, 1:04 P.M. ET
By BOB TITA

Deere & Co. swung to a fiscal fourth-quarter profit from a year-earlier loss, but forecast lower-than-anticipated profit next year on rising expenses and moderating sales growth.

Deere, the world's largest manufacturer of farm machinery, expects profit of about $2.1 billion next year, compared with $2.24 billion estimated by analysts. Deere expects equipment sales, including construction and forestry machinery, to rise 10% to 12% next year from 2010. Equipment sales in the fiscal year ended Oct. 31 rose 14% from 2009.

The company said $250 million of additional material costs, expenses for complying with tougher U.S. regulations for engine exhaust and other production-related expenses will provide headwinds for profit next year.

"2011 will be a year of significant new model introductions, due in large part to the engine conversion," said Susan Karlix, manager of investor communications, during a conference call. "We will experience some production limits and transitional issues."

The Moline, Ill., company also has a reputation for offering conservative outlooks [a major understatement]. The company's initial profit guidance for 2010 was $900 million. It ended up earning more than twice that amount. As a result, some analysts were quick to conclude Wednesday that Deere is likely to bump up its profit guidance as 2011 unfolds.

"We fully anticipate that the company should exceed" guidance, said Lawrence De Maria, an analyst for brokerage firm Sterne, Agee & Leach, in a note to investors. "Overall commodity prices are highly supportive of incremental machinery purchases in many regions of the world."

In recent quarters, Deere has benefited from rising prices for corn, soybeans, cotton and other farm commodities. The company expects total cash receipts from farming in the U.S.—a key driver for machinery sales—to rise to $346.9 billion next year from $322 billion forecast for 2010. The company also sees sharply higher farm incomes in Brazil and Argentina on rising prices for farm crops.

But Deere predicted that industry-wide sales of farm equipment will be flat next year with 2010 in the U.S., Canada and South America. Farm machinery sales in Western Europe, which has been a depressed market this year, are expected to rise 5% to 10% next year.

Deere expects sales of its own farm and turf machinery to increase 7% to 9% next year, after growing by 10% in fiscal 2010. [The Ag & Turf division produces about 85% of DE’s overall sales.]

The company sees sales of its construction and forestry equipment increasing 25% to 30% next year after rising 41% in 2010 against a severely depressed level in 2009. [Construction & Forestry produces about 15% of DE’s overall sales.]

For the quarter ended Oct. 31, Deere reported a profit of $457.2 million, or $1.07 a share, compared with a year-earlier loss of $222.8 million, or 53 cents a share, which included $364.8 million, 76 cents a share, of write-downs. Revenue jumped 35% to $7.2 billion, as equipment sales rose 39% from a year earlier.

Analysts polled by Thomson Reuters had forecast earnings of 95 cents a share on $6.25 billion in revenue. The company anticipates fiscal first-quarter sales of equipment to rise 34%.‹