John Deere & Company (DE, Financial) reported a drop in first quarter earnings for fiscal 2015 as the company continues to face the impact of a sluggish global farming sector resulting in reduced demand for agricultural equipment.
While revenue dropped 17% compared to the prior-year quarter to $6.38bn, net income plunged 43% from $681.1 million or $1.81 a share in Q1 2014 to $386.8 million or $1.12 a share. Although both revenue and earnings for the quarter beat expert estimates that had been pegged at $5.53bn and 83 cents a share respectively, Deere’s announcement of a cut in its profit forecast for FY2015 sent the company’s share down 1.4% in pre-market trading to $90.44.
Equipment Sales Suffer due to Sluggish Global Farm Sector
Deere witnessed a 19% fall year-over-year in net sales of farming equipment to $5.6bn in Q1 2015, inclusive of a 1% price realization offset by a 2% negative impact of currency headwinds. The slide is attributed to the overall sluggish farming market, with the net income for farmers in the US alone dipping to $73.6bn in 2015, compared to $108bn in 2014. Consequently farmers find themselves being squeezed by the declining price of commodities such as soybeans and corn, resulting in less cash on hand to buy new equipment.
While the company witnessed a 14% drop in equipment sales in Canada and the US, sales in the international market fell 28%, with cost of sales decreasing 15% year-over-year during the quarter to touch $4.42bn. Consequently, Deere logged a gross profit of $1.96bn in the first quarter of fiscal 2015, down 20% from the year-ago quarter. Lower shipment volumes combined with a less favourable product mix, partially offset by lower operational expenditure and price realization, resulted in a 54% year-over-year plunge in the company’s operating income from equipment operations to $414 million. Operating profit also plunged 40% to $647 million compared to the year-ago quarter.
Deere is however not alone in fighting the downward market trend. AGCO Corp. (AGCO, Financial), one of the company’s competitors, also logged a 16 percent year-over-year decline in its Q4 2014 earnings to $1.18 a share.
Segment wise, Deere’s Agricultural & Turf division is its biggest revenue driver. Despite a 27% decline to $4.1bn, the segment still represented almost two thirds of the company’s sales in the Q1 2015. The company witnessed a 13% year-over-year sales growth to $1.52bn in its Construction & Forestry division on the back of greater shipment volumes. Deere also raked in $648 million in revenues, representing a 10% year-over-year growth, through its Financial Services subsidiary. The improvement was a result of growth in the division’s credit portfolio as well as higher insurance margins.
The Way Ahead
For the remainder of FY2015, Deere expects a net income of $1.8bn, down from its earlier guidance of $1.9bn. Equipment sales are projected to continue on the downward trend, dropping 17% compared to the prior-year figures. While the company foresees a 19% year-over-year decline in sales during the second quarter, it’s Agriculture and Turf division is expected to witness a 23% decline during the full fiscal 2015 owing to an enduring fall farm incomes as well as commodity prices.
Region wise, Deere expects to see a 25%-30% decline in industry sales of farm equipment in Canada and the US, while sales in the European market are estimated to slide 10%. In the South American market, industry sales of tractors and combines are projected to fall by 10%-15% year over year owing to uncertainty in Brazil’s economy. While in the Commonwealth of Independent States, Deere expects sales to weaken further, the company expects sales in Asia to witness a slight dip, with major portion of the decline centring on India and China.
Segment wise, Deere expects the general economic growth to spur a roughly 5% sales growth of turf and utility machinery in Canada and the U.S. Concurrently, greater housing starts in the US and economic recovery are likely to push global Construction & Forestry equipment sales by around 5% in fiscal 2015. However, the company will have to watch out for enduring deterring factors such as weakness in the energy sector as well as energy-producing regions. Net income from Deere’s Financial Services division is projected at roughly $630 million for the full fiscal.
Final Thoughts
With the current growing demand for infrastructure, shelter and food across the word, experts believe that the long-term outlook for Deere remains strong.
Global trends based on rising standards and population growth are largely unaffected by intermittent swings in agricultural economy. Although sales of farming equipment are expected to be lower in FY2015 due to weak farm income, Deere is expected to benefit from the improvement in nonresidential construction sector as well as its cost cutting initiatives. Consequently, while the company hopes to remain solidly profitable in fiscal 2015, the Deere & Company shares currently carry ‘hold’ guidance for the short to mid-term.
