The Rising Influence of Rising Affluence

[DewDiligence]

DE Reports Record FY3Q11 Results

[This was the fifth consecutive record earnings for a given FY quarter—clearly DE is benefiting strongly from the ag component of The Global Demographic Tailwind (see #msg-59333127, #msg-54541553, #msg-53145566, and #msg-51844339 for background info).

Farmers are flush with cash from sky-high crop prices, which increases demand for DE’s tractors and combines. However, the costs of steel and rubber (DE’s most important input materials) are soaring. DE has been able to pass along most but not all of the increase in input costs, and hence its operating margin slipped slightly during FY3Q11, which caused a small sell-off of about 1% yesterday. DE said its expects future profit margins to remain at historically high levels, so the margin slippage during FY3Q11 is nothing to worry about, IMO.

FY3Q11 EPS was $1.69, +15% YoY. FY3Q11 product sales (excluding income from the finance subsidiary) were +24% YoY (+16% from volume, +3% from pricing, -1% from mix, +6% from currency). FY3Q11 product sales were +22% YoY in the ag division (~85% of product sales) and were +34% YoY in the construction division (~15% of product sales). Ex-US/ex-Canada sales grew 49% YoY (helped by a weaker US dollar) and comprised 43% of total sales.

The operating margin was slightly down from prior quarters, which was part of the reason for the small sell-off yesterday. Still, DE expects future operating margins

DE raised its profit guidance for FY2011 (ending 10/31/11) to $2.7B, which equates to EPS of $6.35; this is up from the prior guidance of $6.21, which was itself raised from $5.86 three months ago (#msg-63258250). One small blemish, however, is that DE expects lower sales and profits in Brazil during the rest of FY2011 and FY2012.

DE has not yet given profit guidance for FY2012, but has stated the intention of doubling sales during the next seven years (#msg-60344244; I think they can do it. My own EPS expectation for FY2012 is at least $7.15; at the current share price, DE thus sells for ~12x DE’s FY2011 guidance and ~10.5x my FY2012 expectation, which makes it a screaming buy, IMO. (I added shares at $73 and change yesterday.)

DE’s CC slides are at http://www.deere.com/en_US/docs/Corporate/investor_relations/pdf/financialdata/reports/2011/2011_thirdquarter_confcallslides.pdf .]

http://finance.yahoo.com/news/Deere-Reports-ThirdQuarter-prnews-1434665572.html?x=0&.v=1

›Wednesday August 17, 2011, 7:00 am EDT

• Income jumps 15 percent for third quarter, marking fifth consecutive quarter-over-quarter record.
• Broad-based improvement reflects higher results from all divisions.
• Healthy global farm sector continues to support performance.
• Company on track for full-year sales and earnings records.

MOLINE, Ill., Aug. 17, 2011 /PRNewswire-FirstCall/ -- Net income attributable to Deere & Company (NYSE:DE) was $712.3 million, or $1.69 per share, for the third quarter ended July 31, compared with $617.0 million, or $1.44 per share, for the same period last year.

For the first nine months of the year, net income attributable to Deere & Company was $2.130 billion, or $5.01 per share, compared with $1.408 billion, or $3.28 per share, last year.

Worldwide net sales and revenues increased 22 percent, to $8.372 billion, for the third quarter and were up 24 percent to $23.401 billion for nine months. Net sales of the equipment operations were $7.722 billion for the quarter and $21.563 billion for nine months, compared with $6.224 billion and $17.009 billion for the corresponding periods last year.

"Bolstered by yet another quarter of record results, John Deere remains on track for a year of exceptional achievement," said Samuel R. Allen, chairman and chief executive officer. "Our success reflects strong demand for the company's advanced equipment and the skillful execution of our ambitious business plans. These are aimed at expanding our global competitive position and introducing the John Deere brand to a wider group of customers."

Increased sales of large farm machinery are having a major impact on Deere's performance, Allen said, while construction-equipment sales are moving higher in spite of weakness in the North American residential and commercial construction sectors. "The company is achieving record performance in spite of certain key markets being in the early stages of recovery. This reflects our focus on managing costs and assets, while enhancing our geographic footprint and providing a range of innovative products and services to a growing global customer base."

Summary of Operations

Net sales of the worldwide equipment operations increased 24 percent for the quarter and 27 percent for nine months compared with a year ago. Sales included a favorable currency-translation effect of 6 percent for the quarter and 4 percent for nine months and price increases of 3 percent for both periods. Equipment net sales in the United States and Canada increased 10 percent for the quarter and 19 percent year to date. Outside the U.S. and Canada, net sales were up 49 percent for the quarter [!] and 40 percent for nine months, with favorable currency-translation effects of 16 percent and 8 percent, respectively.

Deere's equipment operations reported operating profit of $969 million for the quarter and $2.883 billion for nine months, compared with $890 million and $2.193 billion last year. The increases were largely due to the impact of higher shipment volumes and improved price realization, partially offset by higher raw-material costs and increased selling, administrative and general expenses.

Net income of the company's equipment operations was $584 million for the quarter and $1.777 billion for nine months, compared with $512 million and $1.135 billion for the respective periods last year. The same operating factors mentioned above affected quarterly and nine-month results. In addition, a lower tax rate benefited performance for the year to date.

Financial services reported net income attributable to Deere & Company of $125.6 million for the quarter and $348.9 million for nine months compared with $102.1 million and $274.1 million last year. Results for both periods were higher primarily due to growth in the credit portfolio and a lower provision for credit losses, partially offset by narrower financing spreads.

Company Outlook & Summary

Company equipment sales are projected to be up about 25 percent for fiscal 2011 [up from the prior guidance of +21-23%] and up about 20 percent for the fourth quarter compared with the same periods a year ago. Included is a favorable currency-translation impact of about 4 percent for both periods. For the full year, net income attributable to Deere & Company is anticipated to be approximately $2.7 billion. [This equates to EPS of $6.35, based on 427M diluted shares outstanding.]

Reflecting improvement from the company's previous estimate, the annual forecast now includes a negative impact of approximately $70 million in sales and $10 million in operating profit from the effects of the Japanese earthquake and tsunami earlier this year. [I.e., the earthquake is now expected to cause a hit of only $0.02 in FY2011 EPS compared to the prior guidance of a $0.11 hit.]

According to Allen, the company's 2011 performance is providing significant momentum to its future growth plans. "John Deere's aggressive investment in new products and expanded global capacity puts the company on a sound footing to address the world's growing need for food, shelter and infrastructure," Allen stated. "We remain confident that these positive macroeconomic trends have staying power and should prove rewarding to the company and its stakeholders in the years ahead." At the same time, he noted, concerns over the health of the global economy and recent turmoil in world financial markets have introduced an additional element of uncertainty into the near-term outlook.

Equipment Division Performance

Agriculture & Turf. Sales increased 22 percent for the quarter and 23 percent for nine months largely due to higher shipment volumes, the favorable effects of currency translation and improved price realization.

Operating profit was $859 million for the quarter and $2.579 billion year to date, compared with $824 million and $2.128 billion, respectively, last year. The improvement in both periods primarily was due to the impact of higher shipment volumes and improved price realization, partially offset by increases in raw-material costs and selling, administrative and general expenses.

Construction & Forestry. Construction and forestry sales rose 34 percent for the quarter and were up 50 percent for nine months mainly due to higher shipment volumes and improved price realization. The division had operating profit of $110 million for the quarter and $304 million for nine months, compared with $66 million and $65 million last year. Operating profit for both periods moved up primarily due to higher shipment and production volumes and improved price realization, partially offset by increased raw-material costs and selling, administrative and general expenses.

Market Conditions & Outlook

Agriculture & Turf. Worldwide sales of the company's agriculture and turf division are forecast to increase by about 21 percent for full-year 2011, with a favorable currency-translation impact of about 4 percent. Farmers in the world's major markets are experiencing solid levels of income due to rising demand for agricultural commodities as well as high crop prices.

Industry farm-machinery sales in the U.S. and Canada are forecast to be up 5 to 10 percent for the year, following a healthy advance in 2010. Overall conditions remain positive and demand continues to be strong, especially for high-horsepower equipment.

Industry sales in the EU 27 nations of Western and Central Europe are forecast to increase by 10 to 15 percent, while sales in the Commonwealth of Independent States are expected to be notably higher. Farm conditions have remained generally favorable in both areas, though adverse weather has negatively affected harvest activity and grain quality in parts of Europe. Sales in Asia are forecast to rise sharply again this year.

In South America, industry sales for the year are projected to be down about 5 percent versus strong levels of 2010. The decline, primarily due to weakness in the small-tractor market in Brazil and adverse trade policies in Argentina, is being partly offset by strength in large farm equipment. Deere's own sales in the region are benefiting from a broader lineup of recently introduced products.

Industry sales of turf and utility equipment in the U.S. and Canada are expected to be about the same as in 2010.

Construction & Forestry. Deere's worldwide sales of construction and forestry equipment are forecast to increase by about 45 percent for full-year 2011. The increase reflects market conditions that are somewhat improved in relation to last year's low level and increased activity outside of the U.S. and Canada. Construction equipment sales to independent rental companies are seeing significant growth. World forestry markets are experiencing a further rebound after last year's strong gains with particular improvement in Europe.

Financial Services. Full-year 2011 net income attributable to Deere & Company for the financial services operations is expected to be approximately $460 million. The forecast increase from 2010 is primarily due to growth in the portfolio and a lower provision for credit losses.‹