Deere and Co. reported higher-than-expected quarterly profit on Wednesday on strong sales of its tractors and harvesters in the Americas. But concerns that farm-belt spending and commodity prices were poised to weaken sent shares lower.
Earlier this year, Deere, the world’s largest maker of agricultural equipment, lowered its outlook for fiscal 2013 revenue, saying a cooler-than-normal spring in North America had depressed sales. Some investors worried the softness was a sign of a new normal as corn prices have retreated from the all-time highs of last summer.
A number of analysts, including UBS, Barclays and William Blair, have cut their outlooks and share-price targets for Deere in recent days, citing concerns that farmers will slash capital spending as grain prices retreat.
Despite the earnings beat that was driven by its ability to pass price increases along to buyers of both its farm and construction equipment, the company did not change its full-year sales outlook.
William Blair analyst William De Maria said that results for the third quarter ended July 31, while impressive, suggested “the peak may have just occurred.”
Indeed, De Maria said while Deere raised its forecast for full-year earnings to reflect the earnings beat, the company’s outlook implied a lower fourth-quarter profit than many analysts were modeling going into Wednesday.
Moline, Illinois-based Deere also predicted farmers’ cash receipts from crop sales, which closely correlate with tractor and combine purchases, would fall four per cent next year. The receipts are already expected to be down eight per cent this year.
Like many analysts who cover the company, Adam Fleck at Morningstar said Deere’s “sales and earnings will decline next year” along with cash receipts.
Sales top estimate
Earnings in the most recent quarter rose to $996.5 million, or $2.56 a share, from $788 million, or $1.98 a share, a year earlier (all figures US$).
Analysts, on average, expected the company to report a profit of $2.17 a share, according to Thomson Reuters I/B/E/S.
Total sales, including revenue from the company’s financial services unit, rose four per cent to $10 billion. The analysts’ average estimate was $9.1 billion.
In a statement, CEO Samuel Allen said the nearly 30 per cent jump in earnings per share reflected “considerable strength in the farm sector, especially in North and South America.” That offset continued weakness in sales of its earth-moving equipment to builders.
But Allen also sounded a note of caution, saying Deere was “keeping a close watch on costs and assets.”
For decades, corn prices hovered between $2 and $3 a bushel, but surged as high as $8.49 during last summer’s drought, driven by demand from China and other emerging markets as well as by corn-based ethanol use in the United States.
But the surge in grain prices also triggered a sharp increase in production in the rest of the world as farmers scrambled to take advantage. Now with the prospect of a record global harvest, commodity prices have skidded lower.
Since tractor and combine sales go up and down along with farm income, analysts expected growers will try to do more with less in the coming years and cut spending.
During a conference call, Tony Huegel, director of Deere’s investor relations unit, reminded analysts that current corn prices, while well off last year’s highs, were still strong from a historical standpoint and at “profitable levels for most farmers.”
— James Kelleher is a Reuters correspondent in Chicago.