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Carolyn Surh/MEDILL

Deere & Co.'s improved performance in recent quarters is reflected in its rising stock.


Deere & Co. boosts profit and forecast

by Carolyn Surh
May 19, 2010


Deere & Co. boosted second quarter profit, beating analysts’ expectation by a solid 17 cents per share. The Moline-based equipment manufacturer raised its forecast because of strong global demand for large farm machinery and recovering key markets. The stock rose.

Improved performance was a result of stronger price integrity, higher production volumes and favorable foreign exchange and raw-material cost outcomes, according to the company.

Net income in the quarter ended April 30 jumped 16 percent to $547 million, or $1.28 per diluted share, from $472 million, or $1.11 per diluted share, during the same period in 2009.

Total revenues climbed 6 percent to $7.1 billion from $6.7 billion in the same quarter of the prior year. U.S. and Canada revenues increased 4 percent, while other sales grew 9 percent.

“The quarter’s improvement was broad-based,” said Marie Ziegler, Deere’s vice president of investor relations, during a call Wednesday with analysts. She attributed the overall quarterly performance to a combination of “disciplined cost and asset management,” higher margins in the three sales divisions and signs of recovery in the troubled construction and forestry division.

Construction and forestry sales jumped 52 percent to $911 million. The increase reflects “global forestry markets improving from a very low base” in the prior year and “improving” U.S. economic indicators, explained company spokeswoman Susan Karlix. Agriculture and turf sales, which represent the vast majority of Deere’s volume, increased $50 million or 1 percent compared with the second quarter in 2009.

A charge of $129.5 million, or 30 cents per share, related to U.S. healthcare legislation was taken during the quarter, the company said.

Analysts were pleased with Deere’s performance.

“The numbers are good, so that’s obviously a good thing,” said GAMCO Investors Inc. analyst Heiko Ihle. “It did well on a day when most stock did pretty poorly.”

UBS AG analyst Henry Kirn made note of Deere’s “better than expected” margins, and maintained his neutral rating and 12-month price target of $61.

In the six months ended April 30 Deere's income rose 17 percent to $791 million from $676 million compared with the same period last year, and revenue rose 1 percent to $12.0 billion from $11.9 billion during the first half of 2009. Diluted earnings per share climbed to $1.85 from $1.60.

Deere raised its fiscal year sales forecast to a gain of 11 percent to 13 percent more than last year, up from its February forecast of a 6 percent to 8 percent rise. The company also increased its net income guidance to $3.73 per diluted share, compared with the prior year's $2.06 per diluted share.

While its domestic market is improving, Deere’s growth is largely driven by strong farm and agricultural growth in South America. Equipment sales in the United States and Canada are forecast for a 5 percent to 10 percent  increase by year-end. Driven by favorable economic conditions in Brazil and normalizing weather in Argentina, Deere’s South American sales are expected to end the fiscal year with a 25 percent increase over the prior year.

Brazil is proving to be an especially important market for Deere, with significant growth in planted acreage and production in sugarcane and soybeans in 2010, and low-interest financing programs through its government. Deere has been expanding its product assortment and number of dealerships in the country.

While the company reported some stabilization in its European markets, the region is expected to remain under pressure.

In a note, Jefferies & Co. Inc. analyst Stephen Volkmann commented on Deere’s earnings that “stock reaction should be positive.”

The stock closed at $58.87, up $1.71 or 3 percent, performing strongly on a sluggish day. The Dow Jones industrial average closed down 66.6 points, or 0.6 percent, and competitor Caterpillar Inc.’s stock slipped 2.8 percent to $61.44.