Let’s Dig Into Deere’s Quarter

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Nearly everyone is familiar with the products made by Deere & Co. (NYSE:DE) In fact, we are now in the quarter in which sales are often strongest. What you may not know is that this company is valued at nearly $100 billion and makes a massive profit. In this article, I will dig into the most recent earnings report put out by Deere & Co.

Income

When reviewing the quarterly results, two numbers jump out. First, net income. Net income attributable to Deere & Co. was $980.7 million, or $2.65 per share, for the second quarter (which ended April 30), a year-over-year decline. In the comparable quarter last year, Deere a& Co. booked $1.084 billion, or $2.76 per share. The second number that jumps out was Deere & Co.’s income for the first six months of its fiscal 2014, which is still ahead of the pace in 2013 thanks so a solid Q1. For the first six months of 2014, net income attributable to Deere & Co. was $1.662 billion, or $4.46 per share, compared with $1.734 billion, or $4.41 per share, last year.

Sales and revenues

Of course, net income is made up of the total revenues brought in minus total expenses. It is in these numbers where some of the weakness is noted. Overall, the company is solid, but as we are all too familiar, the Street rewards growth. Deere & Co. reported that worldwide net sales and revenues decreased 9 percent, to $9.948 billion, for the second quarter and were down 4 percent, to $17.602 billion, for the first six months of 2014. Net sales of the equipment operations were $9.246 billion for the quarter and $16.195 billion for six months, compared with $10.265 billion and $17.058 billion for the same periods last year.

Samuel R. Allen, chairman and chief executive officer, said: “John Deere is on its way to another year of solid financial and operating performance. Our second-quarter earnings showed further proof of the adept execution of our operating plans. We kept costs and assets well under control while successfully managing major new-product transitions associated with more stringent emissions standards. In addition, our construction and forestry and financial services operations delivered improved results, reflecting the power of our broad-based business lineup.”

Operations

Sales of equipment operations were also disappointing. Net sales of worldwide equipment operations declined 10 percent for the quarter and 5 percent for six months compared with the same periods a year ago. A remarkable declined was noted in North America. Equipment net sales in the United States and Canada decreased 12 percent for the quarter and 6 percent year to date. Outside the U.S. and Canada, net sales were down 6 percent for the quarter and 3 percent for six months.

Deere & Co.’s equipment operations reported operating profit of $1.361 billion for the quarter and $2.252 billion for six months, compared with $1.663 billion and $2.5 billion last year. The company attributed the decline for both periods to the impact of lower shipment volumes, the unfavorable effects of foreign-currency exchange, and a less favorable product mix, partially offset by price realization. Taken together, net income of the company’s equipment operations was $838 million for the second quarter and $1.381 billion for the first six months, compared with $953 million and $1.478 billion in 2013.

What I found to be interesting was that net income significantly declines from operations, but in addition to the operating factors mentioned above, a lower effective tax rate benefited both quarterly and six-month results. Thus, realized income would have been far lower without this tax benefit.

Credit services

Here was a bright spot in the company’s performance. Deere & Co.’s financial services reported net income of $147.7 million for the quarter and $289.9 million for six months in 2014 compared with $125 million and $257.9 million last year. The improvement for the quarter was due to growth in the credit portfolio, partially offset by higher selling, administrative, and general expenses.

Company outlook

Company equipment sales are projected to decrease about 4 percent for fiscal 2014 and for the third quarter compared with the year-ago periods. Included is an unfavorable currency-translation effect of about 1 percent for the year. For the fiscal year, net income attributable to Deere & Co. is anticipated to be about $3.3 billion.

Allen said in a press release: “John Deere expects to achieve near-record earnings for the full year and the company is well-positioned to deliver solid financial results throughout the business cycle. We’re confident our extensive investments in new products and markets, coupled with a tight rein on costs and assets, will keep the company on a sound financial footing and help sustain our growth plans.”

Take on the company moving forward

Deere & Co.’s worldwide sales of agriculture and turf equipment will likely decline for fiscal year 2014 based on current performance and crop outlooks. While in general the global agricultural economy is in fine shape, the federal government projects that farm income is forecast to be lower than last year. This will pressure demand for farm equipment, especially for larger models. Deere’s worldwide sales of construction and forestry equipment are forecast to increase by about 10 percent for full-year 2014. The gain reflects further economic recovery and higher housing starts in the U.S., as well as sales increases outside the U.S. and Canada. I expect global forestry sales to be up for the year due to general economic growth and improved sales in European markets noted in the quarterly report.

I think real strength will come from the credit services section of Deere & Co.’s portfolio due to growth in its credit services and better effective tax rates. Fiscal year 2014 net income attributable to Deere & Co. for the financial services operations could reach $600 million. The outlook reflects improvement over last year due primarily to expected growth in the credit portfolio and a more favorable tax rate. What the company needs to do is watch expenses, which have been creeping up annually.

With revenues slightly declining and administrative expenses rising, the stock is a hold. The economy remains strong, while Deere & Co. continues to perform. Nothing about this report suggests the stock is a buy, though long-term shareholders will be rewarded with a dividend for their patience. Then again, at $92.37, hovering near a 52-week high, I can’t blame investors for taking a profit. Considering we are heading into strong sales seasons, I think it is best for investors to give the company the benefit of the doubt and hold tight.

Disclosure: Christopher F. Davis holds no position in Deere & Co. and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock.

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