Good news from Deere (DE) on fiscal first quarter 2014 earnings. The company announced earnings of $1.81 cents a share, 28 cents a share above the Wall Street consensus on revenue of $6.95 billion. (Also above Wall Street consensus of $6.76 billion.)
But the company’s closely watched estimate of farm incomes pointed to a drop in cash receipts in 2014 of 7% from the record level of 2013. Global corn planting is likely to fall in 2014, Deere reported.
That’s certainly not good news for such agriculture stocks as fertilizer producers Potash of Saskatchewan (POT), Mosaic (MOS) and Yara International (YARIY.) And it’s not good news for Deere for 2014 as a whole either. The company lowered guidance for the quarter that ends in April to sales of $9.65 billion versus the current Wall Street consensus of $9.89 billion. That would represent a 6% drop in sales in the quarter.
Deere’s agriculture equipment sales weren’t all that robust in the quarter with sales of farm equipment climbing just 2% year over year. Operating income for that part of Deere’s business (78% of sales in 2013) climbed 4%. It was the recovery of sales for construction and forestry equipment that led to the first quarter earnings beat. Sales for those businesses climbed 4%, but operating income grew by 32%.
Deere expects the construction equipment business to continue to outperform in 2014. For the year Deere guided analysts to a 10% increase in 2014 sales for this unit. Unfortunately, Deere said sales at the remainder its business are projected to fall by 6% in 2014. That’s not surprising since Deere projects industry sales of farm equipment will drop by 5% to 10% in North America, by 5% in the European Union, and by 5% to 10% in South America. Industry sales in Asia will be up slightly, Deere projects.
This slightly negative appraisal—only slightly negative, I’d say, because 2013 was a record year for farm incomes—has been echoed by other companies in the agriculture sector. Read more
U.S. corn and soybean crops are on track to be so large for the 2013-2014 harvest year that farm income will climb 8.6% to $131 billion from the $121 billion forecast in August even though grain prices have declined, according to the U.S. Department of Agriculture. That new projection is a 15% increase from the 2012-2013 harvest year.
U.S. farmers are projected to produce a record 14 billion bushels of corn this harvest year and 3.6 billion bushels of soybeans. (That would be the third largest soybean harvest on record.) Corn prices on the Chicago Board of Trade are down 39% this year.
The higher than expected farm income is good news for companies that sell to farmers, which have been forecasting slower sales in 2014 on lower grain prices. Read more
It’s not frequently that investors hear a company beat earnings estimates by 47 cents a share and then see its shares fall, but that’s exactly what we’re seeing today with Deere (DE).
Today before the open the company reported earnings for the third quarter of fiscal 2013 of $2.64 (adjusted for one-time items). Wall Street had been expecting earnings of $2.17 a share. Operating margins rose to 15.5% for the quarter. That was a big improvement from the 12.6% operating margin in the fiscal second quarter and about 2 percentage points above what Wall Street expected.
And that may indeed be the root of the stock’s problem today. Although the company crushed earnings estimates, it didn’t do nearly as well on revenue. Net sales rose just 4.3% in the quarter year over year to $9.32, just a tad ahead of the Wall Street estimate at $9.28 billion. For the full 2013 fiscal year Deere kept to its guidance of a 5% increase in revenue but for the fourth quarter the company said it expects a 5% drop in revenue to $8.59 billion. That’s below Wall Street projections
Think about the implications of that. Read more
Deere’s (DE) first quarter fiscal 2013 earnings announced this morning before the market open in New York and the guidance for the rest of the year reminds me—in direction if not in degree–of the earnings Cummins (CMI) reported on February 6. Like Cummins, Deere announced a substantial 25 cents a share earnings surprise—15 cents for Deere if you back out lower than expected tax rates for the quarter. As at Cummins, sales growth didn’t keep up with the earnings surprise. Revenue climbed 11% year over year to $6.79 billion, just slightly ahead of the $6.74 billion Wall Street consensus.
And then, following the earnings announcement, Deere, like Cummins, lowered guidance for the next quarter. Not as drastically as Cummins, which talked of weakness in the first half, but Deere did guide down for the second quarter. The company lowered sales guidance for the next quarter to $9.78 billion from the Wall Street consensus of $9.83 billion. For the full 2013 fiscal year, Deere told analysts to expect 4% revenue growth to annual sales of $35.5 billion. The Wall Street consensus before the call was $35.3 billion. Deere also raised its forecast for 2013 net income to $3.3 billion from the consensus $3.2 billion.
The increase in full-year guidance is pretty much a reflection of the just announced first quarter surprise. Read more
If you’ve been looking for an opportunity to pick up shares of Deere (DE) on a dip, keep your eyes on Wednesday, November 21. The company is scheduled to report earnings for last quarter of its 2012 fiscal year (which ended on October 31) on that date.
The Wall Street consensus calls for earnings of $1.88 a share and revenue of $8.93 billion.
But there’s a decent possibility of negative news in the conference call. Last August, Deere warned that it was having problems manufacturing a new, more complex combine. Delays in delivering machines had reached 14 days, the company said, and some customers had begun to cancel orders. At the time Deere said that it believed it could make up for lost production in the fourth quarter that ended in October.
Are the problems fixed? Did Deere make up for lost production? Did the company’s inventory continue to swell in the fourth quarter?
Investors will want to know.
At a November 19 close of $86.35, Deere is trading near its November 1 high of $86.87. That’s a long way from the stock’s $70.59 low on June 4.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Deere as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/