Deere Earnings: Weak Guidance Overshadows Better Than Expected Results

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Deere’s (NYSE:DE) fourth quarter earnings were expected to be weak, given the slowdown in demand for agricultural equipment across the globe. However, Deere surprised the market with better than expected results. The maker of agricultural and construction equipment reported fourth quarter FY 2014 revenues of $8.96 billion, [1] compared to Thomson Reuters consensus estimates of $7.75 billion and earnings per share of $1.83, compared to Thomson Reuters consensus estimates of $1.57. [2]  However, Deere’s weak guidance for FY 2015 overshadowed its better than expected results, which led to a 2.6% decline in its stock price as soon as the market opened.

Deere’s fourth quarter revenue fell 5.1% due to a double digit decline at its Agriculture & Turf division, partially offset by growth at its Construction & Forestry and Financial Services segments. We expect that the trends driving these segments will likely continue in the near term, leading to further declines in Deere’s revenue and earnings.

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Weak Guidance Due To Agricultural Equipment Demand Declines

In the fourth quarter, Deere reported a 13.1% year-on-year drop in sales of its Agriculture & Turf equipment division, as it continued to be plagued by declining sales of its agricultural equipment. Low crop prices across the globe, driven by bumper crop output in 2013 and 2014, have been severely impacting farmers’ income, discouraging them from purchasing new agricultural equipment or repairing existing equipment. According to recent reports by the U.S. Department of Agriculture, corn output is expected to increase by 3.5% year-on-year in 2014 and soybean by 17.9%. [3] The increase in output will likely continue to pressure crop prices. Looking at the weak performance in the quarter and expectations of a further decline in crop prices, Deere announced expectations of an even weaker FY 2015, forecasting a 20% year-on-year decline in Agriculture & Turf equipment sales.

Agriculture & Turf margins have been compressed due to the decline in production volume. In the fourth quarter, the segment’s operating profits declined by 31.5%, also impacted by implementation costs related to Tier 4 engines and warranty costs. In order to protect its margins from the drop in demand for agricultural equipment, Deere will continue to focus on cutting down production and costs. In August, Deere announced that it will lay off more than 1000 employees as it scaled back production.

Construction Equipment Sales Partially Offset Agriculture Decline

Deere’s Construction & Forestry segment was the bright spot in its fourth quarter earnings. Its Construction & Forestry sales grew 23% on the back of a robust U.S. construction sector, wherein housing starts and construction spending have shown strong growth despite tough comparables in the previous year. In the three months ended October 31, housing starts grew 12.1% year-on-year. [4] Also, in the two months ended September 30, overall construction spending in the U.S. increased 3.5% year-on-year. [5] The outlook for the segment’s performance in FY2015 looks good, given the National Association of Home Builders’ forecast of a 16.8% increase in housing starts in 2015, compared to expectations of a 6.7% increase in 2014. [6]

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Notes:
  1. Deere’s FY 2014 Q4 Earnings Media Release And Financials, November 26, 2014, www.deere.com []
  2. Deere & Co. Analysts Estimates, www.reuters.com []
  3. USDA Crop Production Report, November 10, 2014, www.usda.gov []
  4. U.S. Housing Starts, www.ycharts.com []
  5. U.S. Construction Spending, www.ycharts []
  6. Housing and Interest Rate Forecast, October 31, 2014, www.nahb.org []