Deere Poised for Profit Boost as Drought Seen Affecting 2013

Deere CEO Sam Allen
Deere Chief Executive Officer Sam Allen is still reaping the benefits of U.S. farmers’ record $98.1 billion in net income last year, which has helped them to upgrade tractors and combines. Photographer: Tim Boyle/Bloomberg

Deere & Co., the largest maker of agricultural equipment, may post a 37 percent gain in earnings on higher farm income and foreign sales while the worst U.S. drought in five decades weighs on performance next year.

Deere will probably say tomorrow that fiscal third-quarter profit rose to $2.32 a share, according to the average of 17 analysts’ estimates compiled by Bloomberg. The Moline, Illinois-based company is effectively sold out of large farm equipment for the financial year ending Oct. 31 and the implications of the drought in the period are “limited,” Andy Kaplowitz, an analyst for Barclays Plc, said in a report yesterday.

“It should be a good quarter,” Larry De Maria, a New York-based analyst for William Blair & Co. who has a hold rating on the shares, said in an interview yesterday. “The deteriorating sentiment on the drought would likely have more of an effect on 2013 than 2012.”

Deere Chief Executive Officer Sam Allen is still reaping the benefits of U.S. farmers’ record $98.1 billion in net income last year, which has helped them to upgrade tractors and combines. His strategy of trying to boost sales outside the U.S. and Canada, the company’s largest source of revenue, will become even more important in 2013 as a poor harvest in the Midwest may cut farmers’ domestic spending power.

Deere’s earnings have grown more than analysts’ projections for 10 consecutive quarters as U.S. farm receipts and income climbed for two years through last year.

Combine Sales

The company’s tractor and combine sales in June outpaced the industry as a whole, Deere said in its latest monthly audio report on its website. Row-crop tractor sales for June were up “considerably more” than the 25 percent industrywide increase while combine sales rose by “triple digits” compared with an overall 33 percent gain, Deere said.

Shares of Deere rose 0.4 percent to $80.13 at the close in New York. They have climbed 3.6 percent this year. A dozen analysts recommend buying the company, eight have a hold rating and two recommend selling it, according to data compiled by Bloomberg.

Ken Golden, a Deere spokesman, declined to comment ahead of the earnings due before the start of trading tomorrow.

Deere will probably post a 16 percent increase in sales to $9.61 billion in the three months through July, according to the average of 14 analysts’ estimates. Per-share earnings will increase 24 percent to $8.25 a share in the current fiscal year and 5.6 percent to $8.71 in fiscal 2013, estimates show.

USDA Forecast

U.S. net farm income will drop to $91.7 billion this year, the second-highest total, the U.S. Department of Agriculture said in February. The USDA will update its forecast on Aug. 28 to reflect the drought that began hurting crops around June.

While the hottest July since 1936 has seen corn and soybean prices surge to records, the weather also means damaged crops and distress for the worst-affected farmers.

Corn production in the U.S., the largest grower and exporter, will drop 13 percent to a six-year low, the USDA said Aug. 10. The upcoming harvest is estimated at 10.779 billion bushels (273.8 million metric tons), compared with 12.358 billion in 2011.

Crop insurance programs may help support equipment sales. As many as 80 percent of U.S. farmers have some form of the protection, which may “help dampen the magnitude” of a slowdown even in 2013, said Kaplowitz, who recommends buying Deere shares.

Brazilian Farmers

While farmer income from the U.S. harvest will drive agricultural capital spending in 2013, longer-term factors such as rising demand for higher-quality diets globally will give Deere a “bright future,” Joel Levington, the managing director for corporate credit at Brookfield Investment Management Inc., said in an e-mail yesterday.

Deere’s sales outside the U.S. and Canada climbed to 39 percent in fiscal 2011, from 29 percent five years earlier. That trend may soften any blow from the U.S. drought as farmers in countries such as Brazil respond to record corn prices with increased planting.

Foreign farmers “could respond to higher global commodity prices by planting even more acres of corn (and other cash crops including soybeans) next year, which ultimately could drive increased equipment demand in 2013 and beyond,” Kaplowitz said.

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