Deere’s Earnings Suffer On Weak Farm Equipment Demand

+4.22%
Upside
385
Market
402
Trefis
DE: Deere logo
DE
Deere

Deere & Co. (NYSE:DE) posted 5% year-on-year decline in revenue to reach $9.5 billion, for its third quarter fiscal year 2014 earnings (fiscal year ends October 31). [1] Deere’s results suffered due to weak conditions in the global farm equipment sector, which negatively impacted revenue of its Agriculture & Turf business. However, this was partially offset by gains at its Construction & Forestry and Financial Services businesses. Net profits and earnings per share declined 14.6% and 8.9% respectively.

Deere revised its revenue guidance further downwards due to continued weakness in the global farm equipments sector. It now forecasts a full fiscal year revenue decline of 6% year-on-year, compared to its previous guidance of 4%. Net income is expected to decline to $3.1 billion, compared to the previous expectations of $3.3 billion.

Click here to see our complete analysis of Deere

Relevant Articles
  1. Should You Pick Deere Stock At $360 After 6% Fall In A Week Amid Downbeat Outlook?
  2. Down 4% This Week What’s Next For Deere Stock After Downbeat 2024 Guidance?
  3. Should You Pick Deere Stock At $380 Ahead of Its Q4 Results?
  4. Are Capital Equipment Stocks Like Deere Worth Buying Despite Rising Interest Rates?
  5. Should You Buy Deere Stock After A 10% Fall In A Week Despite Solid Q3?
  6. Is Deere Stock A Better Pick Over KO?

Production to be scaled back on account of weak farm equipment outlook

At present in the U.S., corn, soybean and wheat are trading at its lowest point since 2012. [2] [3] [4] Low crop prices driven by high production levels are hurting the ability of farmers to spend on agricultural equipment. This led to an 11.2% year-on-year decline in revenue of Deere’s Agriculture & Turf division for the third quarter.

The low grain price environment in the U.S. is expected to continue through 2014 and 2015, on account of record-high corn and soybean production expectations this year. [5] Deere also expects to see weak farm equipment markets in Europe and South America for similar reasons. The company has therefore decided to scale back production of its agricultural equipment in line with the expected demand. It is likely that a decline in production may hurt margins due to loss of economies of scale. Agriculture & Turf margins are already under pressure due to implementation costs related to Tier 4 engines, developed in order to ensure compliance with the new emission standards.

Given the weak farm equipment sector outlook, Deere revised its Agriculture & Turf revenue guidance for the full fiscal year 2014 to a decline of 10%, [6] compared to the previous estimate of a 7% decline. The segment’s margins are expected to be around 14% , around 2% lower than the previous year.

Construction & Forestry segment post double-digit revenue growth driven by strong end markets

Partially offsetting the decline in the Agriculture & Turf segment, Deere’s Construction & Forestry segment posted 19.4% year-on-year growth in revenue driven by strong year-on-year construction and housing activity in the U.S. Construction spending was up 8% and 5.5% year-on year in the months of May and June respectively. [7] Housing starts were up 7.5% and 7.6% in the months of May and June respectively. [8] Marginal growth in Europe’s economy also contributed to Agriculture & Turf revenue.

The U.S. housing and construction activity has been somewhat depressed in 2014 due to bad weather conditions at the beginning of the year. Construction spending declined 0.6% and 0.8% sequentially in January and February respectively to reach $947.09 billion. After climbing to $967.78 billion in May, it declined 1.8% in June, the largest sequential drop in three years. The decline was caused primarily due to scale back of spending by local and state governments in efforts to control budget deficits. Higher mortgage rates and property prices further aggravated the situation. [9] In 2013, mortgage rates started increasing post April. Thereafter, it peaked at 4.58% on August 22 2013 and then moved on to decline to 4.14% by August 7 2014. However, compared to the first half of 2013, the U.S. 30 year mortgage rate was 70 basis points higher on average during the first half of 2014. [10] Freddie Mac forecasts the average annual mortgage rate to be around 30 basis points higher in 2014, compared to 2013.

However, the housing market is expected to grow at a moderate rate through the second half of 2014, to reach 1.02 million units for the full year, [11] driven by high building permits. This compares to 0.92 million units in 2013. Based on this positive outlook and its strong order book, Deere forecasts its Construction & Forestry revenue to grow 10% for the full fiscal year 2014.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis) | Get Trefis Technology

Notes:
  1. Deere’s Third Quarter 2014 Media Release and Financials, www.deere.com []
  2. US Corn Farm Price Received Chart, www.ycharts.com []
  3. US Soybean Price, www.ycharts.com []
  4. US Wheat Price Received, www.ycharts.com []
  5. USDA Forecasts Record-High Corn and Soybean Production in 2014 Cotton Production also Up from 2013, August 12 2014, www.nass.usda.gov []
  6. Deere’s Third Quarter 2014 Conference Call Information Slides, www.deere.com []
  7. U.S. Construction Spending, www.yahoo.com []
  8. U.S. housing starts, www.yahoo.com []
  9. US 30 Year Mortgage Rate, www.ycharts.com []
  10. 30-Year Fixed-Rate Mortgages Since 1971, www.freddiemac.com []
  11. August 2014 U.S. Economic & Housing Market Outlook, www.freddiemac.com []