Deere & Company (DE) is scheduled to announce its second quarter 2011 results on May 18, 2011. The current Zacks Consensus Estimate is $2.06 for the second quarter fiscal 2011, projecting year-over-year growth of 30.5%.
With respect to earnings surprises, over the trailing four quarters, Deere outperformed the Zacks Consensus Estimate. The average earnings surprise was 23.2%, implying that Deere has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.
Previous Quarter Recap
Deere delivered earnings of $1.20 per share in its first quarter ended January 31, 2011, striding ahead of the Zacks Consensus Estimate of $1.00 and more than double of 57 cents earned in the year-ago quarter. Net income was more than double from $243.2 million in the first quarter of 2010. The outperformance was largely driven by strong demand for farm machinery coupled with improving conditions in construction and forestry markets.
Deere’s worldwide total sales increased 27% year over year to $6.1 billion, handily beating the Zacks Consensus Estimate of $5.9 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $5.5 billion, a 30% year-over-year increase including an unfavorable currency translation effect of 1% and a price increase of 2%. On a geographic basis, equipment net sales were up 35% in the United States and Canada and 22% in rest of the world.
In terms of sales growth, Construction & Forestry fared better with a year-over-year sales growth of 81% to reach $1.1 billion ascribed to higher shipment and production volumes. The segment operating profit of $88 million reversed the loss of $37 million reported in the prior-year period.
The Agriculture & Turf segment followed with sales increasing 21% to $4.4 billion, led by higher shipment volumes and improved price realization. Operating profit at the segment was $558 million, up 59% year over year. 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 were $507 million in the quarter, almost flat with the prior-year quarter. Net income in the segment was $118 million, up 39% from the year-ago quarter. The improvement was largely driven by portfolio growth and a lower provision for credit losses.
Looking Forward
Deere expects equipment sales to grow 25% in the second quarter and in the range of 18% to 20% for fiscal 2011. Guidance includes a favorable currency-translation impact of 2% for both second quarter and fiscal year. Net income is estimated to be $2.5 billion in 2011.
Segment wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 16% for full year 2011, benefiting from favorable global farm conditions. Construction and Forestry equipment are expected to improve 35% for 2011. Net income from Financial Services is estimated to be $400 million, reflecting continued growth in the portfolio.
Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow 5% for 2011. Western and Central Europe is expected to increase 10%, while sales in the Commonwealth of Independent States are expected to witness moderate gains. In South America, the company expects industry sales to be comparable with the strong levels of 2010.
Estimate Revision Trend
For the second quarter, only one analyst out of 15 covering Deere has raised his estimate over the past 30 days. For fiscal 2011, only one estimate out of eighteen has been raised for Deere. The current Zacks Consensus Estimate is $2.06 for the second quarter, a 30.5% growth from $1.58 in the year ago quarter. For fiscal 2011, the Zacks Consensus Estimate stands at $6.25, an annualized growth of 34.4%.
The limited number of changes to estimates indicate the absence of any major catalyst during the quarter that could drive results. Consequently, most of the analysts are sticking to the estimates they had projected post first quarter earnings.
Magnitude of Estimate Revisions
Over the past 30 days, earnings estimates for the second quarter of fiscal 2011 inched up a penny to $2.06. For fiscal 2011, the estimate improved to $6.25 from $6.23 over the past 30 days. However, there has been no movement in estimates in the past 7 days.
Our Take
Farm cash receipts are the best gauge for farm machinery sales. Farm cash receipts reflect levels of farm commodity prices, acreage planted, crop yields and government policies, including the amount and timing of government payments. Deere’s forecast for farm cash receipts for 2011 stands at $359 billion compared with $321 billion in 2010. The forecast exceeds the previous record of $330.5 billion in 2008 by almost 9%.
The USDA forecasts net farm income to reach $94.7 billion in 2011, up nearly 20% compared with 2010, the second highest inflation-adjusted value for net farm income in the past 37 years. This will drive farmers to invest in the latest machinery to maximize their productivity, thereby benefiting the company.
Deere expects farm income in Brazil to be almost 10 times the level of 2009 and up 80% from 2010 levels led by big increases in sugarcane and soybeans, the two crops that drive the bulk of equipment purchases in Brazil. Contributing to strength in the region is strong global demand for Brazilian commodities, high crop prices, and lower production costs.
On the flipside, margin expansion will be constrained in 2011 given the increased costs for the New Tier 4 products as well as raw material inflation, increased overhead associated with new facilities and SAP implementation at two of Construction & Forestry plants that will be shut for two weeks. Furthermore, production inefficiencies associated with the transition to the initial Tier 4 products as well as heightened R&D expense will also affect margins.
Given increased global demand for food, shelter and infrastructure, we believe the long-term outlook for Deere remains strong. The company currently retains a Zacks #2 Rank (short-term Buy recommendation) on the stock.
Illinois-based Deere & Co. is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells products in the U.S. and Canada through branch offices as well as through distributors and dealers for the resale of products internationally. Deere competes with Caterpillar Inc. (CAT), CNH Global NV (CNH) and Kubota Corporation (KUB).
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