Deere & Co. (DE) delivered earnings per share (EPS) of $1.07 in its fourth quarter ended October 30, 2010, striding ahead of the Zacks Consensus Estimate of 96 cents, almost five times the EPS of 23 cents reported in the year-ago quarter. The outperformance was driven by positive conditions in the U.S. farm sector particularly in terms of demand for large equipment somewhat offset by weak European agricultural markets.

The year-ago quarter excluded the impairment of goodwill related to the John Deere Landscapes reporting unit and voluntary employee-separation expenses associated with the formation of the agriculture and turf division, to the tune of 76 cents. Including this, the company had reported a loss per share of 53 cents in the year-ago quarter.

Deere’s worldwide total sales increased 35% year over year to $7.2 billion, beating the Zacks Consensus Estimate of $6.7 billion handily. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $6.6 billion, a 39% year-over-year increase including a favorable currency translation effect of 1% and a price increase of 3%. This was higher than Deere’s projection of a 32% growth including a negative currency translation of 1% during its third quarter earnings call in August. On a geographic basis, equipment net sales were up 41% in the United States and Canada and 36% in rest of the world.

Segment performance

In terms of annualized sales growth, Construction & Forestry fared better with a year-over-year sales growth of 75% to reach $1.1 billion ascribed to higher shipment and production volumes. The segment operating profit of $54 million was well above the $2 million reported in the prior-year period.

The Agriculture & Turf segment followed with sales increasing 33% to $5.4 billion, led by higher shipment volumes and improved price realization. Operating profit at the segment was $662 million compared with $340.8 million (excluding the impairment of goodwill charge mentioned above) in the year-ago quarter. Including the charge, the segment had reported a loss of $24 million. The increase in operating profit resulted from higher shipment and production volumes and improved price realization, partially offset by higher incentive-compensation expenses and higher raw material costs.

Net revenues at Deere’s Financial Services operations upped 4% to $516 million in the quarter. Net income in the segment was $98.4 million, a reversal from the loss of $15 million in the year-ago quarter. Results increased for the quarter mainly due to last year’s reversal and deferral of wind energy tax credits eligible for cash grants, a lower provision for credit losses, improved financing spreads and growth in the portfolio. However, these benefits were somewhat offset by a write-down of wind energy assets held for sale.

Fiscal 2010 Performance

Deere reported EPS of $4.35, an increase of 53% from $2.82 in the prior year. The year ago EPS excluded the impairment of goodwill related to the John Deere Landscapes mentioned above. Including this, the company had reported an EPS of $2.06 in fiscal 2009.

Deere’s worldwide total sales hiked 13% year over year to $26 billion, beating the Zacks Consensus Estimate of $24.7 billion. Net sales of equipment operations climbed 14% to $23.5 billion. Agriculture and Turf sales were $19.9 billion and construction and forestry sales were $3.7 billion, a year-over-year growth of 10% and 41% respectively.

Financial Position

As of October 31, 2010, Deere had cash and cash equivalents of $3.79 billion, up from $3.75 billion as of July 31, 2010. Net cash from operating activities for the year was $2.3 billion compared with $1.98 billion in the year-ago period.

Debt-to-capitalization ratio remained flat at 79.5% as of October 31, 2010 compared with 79.6% as of July 31, 2010.

Outlook

Equipment sales growth is expected to be about 34% in the first quarter of fiscal 2011, and in the range of 10 to 12% in fiscal 2011 including a negative foreign currency impact of 2% and 1% respectively. Net income in fiscal 2011 is expected to be approximately $2.1 billion. The company projects higher raw-material costs in 2011. Deere plans a record number of new-model introductions in fiscal 2011, due to the implementation of more rigorous global emissions standards.

Segment-wise for fiscal 2011, Agriculture and Turf sales are expected to increase in the range of 7% to 9% and construction and forestry sales are expected to go up 25% to 30%. The Credit operation is expected to generate net income of approximately $360 million in fiscal 2011.

Region-wise, the company expects industry wide sales of agricultural equipment in the United States and Canada to be flat in 2011, as a result of production limits and transitional issues associated with the broad launch of Interim Tier 4-compliant equipment. In South America, industry sales are projected to be flat year-over-year in 2011. Industry sales in Western Europe are forecast to increase 5% to 10%, while sales in Central Europe and the Commonwealth of Independent States are expected to experience moderate gains from the depressed level of 2010. Industry sales in Asia also are also forecasted to grow moderately.

Competitor Performance

Deere’s competitor Caterpillar Inc. (CAT) delivered an EPS of $1.22 in its third quarter ended September 30, 2010, surging 91% from 64 cents in the year-ago quarter and handily beating the Zacks Consensus Estimate of $1.09. The outperformance was driven by improved sales across all regions, led by developing economies and the company’s relentless focus on cost-cutting. Revenues in the quarter were $11.1 billion, a 53% jump from $7.3 billion in the year-ago period and well above the Zacks Consensus Estimate of $10.4 billion.

Our Take

We believe Deere’s launch of the new Tier 4i engine, equipped with the latest technology will likely act as a catalyst for the company. Further, the sale of its wind energy business will enable Deere to focus on its fast growing core equipment business. With an intact farming customer base and improving economic conditions, the company’s sales are ready to rebound significantly. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Illinois-based Deere & Company is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. It also provides financial and other related services. The company operates through three segments: Agriculture and Turf, Construction and Forestry and the Financial Services segment.

 
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