When the Moline based ag equipment major, Deere (DE, Financial), reported its earnings on February 20, analysts were expecting the results to be worse than what came out to be and this actually pushed the stock slightly in the green before it fell back into the red as outlook for the 2015 fiscal year remains dim from the management corner. As the ag sector has not been performing well in the past few quarters, the numbers remain dull and till such temporary headwinds last the company may not see its best days back. But surely the diversification exercise works well for Deere as when the construction equipment sales is up, it somewhat offsets some of the impact of the downturn in ag equipment sales. And that is what is keeping the company still on track and has been portrayed even in the first quarter of the 2015 fiscal year.
Let’s spend some time visiting the major highlights of the first quarter earnings card of Deere.
Revenue and profit decline, though better than estimates
As paltry income of farmers and lower commodity prices are continuously putting Deere into a pressure-cooker environment, its net income came at $386.8 million, or $1.12 per share, declining more than 43% from $681.1 million, or $1.81 per share reported in the first quarter of the previous year.
In a statement during the earnings call, CEO Samuel Allen accepted – “Deere's first-quarter performance reflected sluggish conditions in the global farm sector, which reduced demand for agricultural machinery, particularly larger models, and led to lower sales and income…”
Revenue from equipment operations also exhibited a steep decline of 19% when compared on a year-over-year basis totaling $5.61 billion, though it did beat the Street’s view of $5.43 billion. Worldwide net sales fell 17% standing at $6.38 billion, compared to $7.65 billion reported a year earlier.
The report card clearly indicated that the ag sector woes will continue for some time, while the construction and forestry and financial services division are earning higher profits and aiding in keeping the top and bottom lines at a decent level.
Ag equipment operations plunges, while construction remains the sweet spot
In the quarter, net sales of equipment dropped about 19%. In the U.S. and Canada the drop was around 14% while in international locations the net sales went down 28%. Such a drastic decline in the first quarter was attributed to lower shipment volumes, and the impact of a less favourable product mix.
Operating profit from equipment operations dipped over 53% from $891 million last year to $414 million, while net income from equipment operations closed at $241 million down from $543 million reported a year-ago.
Sales in the ag segment reported a 27% decline for the quarter driven by lower shipment volumes and the unfavorable impact of currency translation. Operating profit went down dramatically to $268 million, down more than 66% from $797 million reported a year ago.
However, the only bright spot in the first quarter was the improvement of net sales in the construction & forestry (C&F) segment which reported a 13% increase in sales, compared on a year-over-year basis resulting from higher shipment volumes. Operating profit in this segment rose over 55% standing at $146 million, from $94 million in the same quarter last year.
Future outlook has lost its lustre
As the larger models of ag machinery are facing dearth in sales in units due to the ag sector turmoil, industry sales of ag equipment in U.S. and Canada are forecast to be down 25-30% in this fiscal year. Lower crop output and pressure on farmers’ income is also going to affect the EU where the entire year sales are predicted to be down 10%. Due to uncertainty looming large in Brazil, in South America equipment sales is estimated to be down 10-15% for the fiscal year. China and India will see dampened growth in equipment sales this year, and Deere projects sales in Asia Pacific region to be down slightly in the fiscal year.
However, the worldwide sale of C&F equipment is forecast to increase by about 5% in 2015 fiscal year. Higher housing starts in the U.S. have aided in offsetting the weakening of the energy sector and that’s the major reason why Deere remains optimistic on the rampant growth to be noticed in this segment during the entire year.
Final word
Deere’s financials are on the erode due to the temporary lull seen in its equipment sales, but the company knows how to control its costs to keep its revenue and profits at a decent level and not run into a loss making concern. The brisk diversification of Deere is a strategy to take the benefit of staying in profits even when the agricultural sector is witnessing a downfall in demand for equipment. The construction segment has pulled up its first quarter numbers immensely, but the company wants to take a cautious stand when it speaks on its upcoming future. Let’s stay tuned and keep an eye on the forthcoming quarters which will have more to say regarding Deere’s near future.
