Deere & Co. forecast better-than-expected profit for fiscal 2015 as demand for its construction equipment mitigated the impact of declining sales of its signature green tractors and combines.
Net income will be $1.9 billion in the year through October, Moline, Illinois-based Deere said Friday in a statement, raising a February projection of about $1.8 billion. It also posted fiscal second-quarter profit that exceeded analysts’ estimates. The shares rose the most since 2011.
Deere’s “construction equipment is largely domestic and should fare well as U.S. markets recover,” Karen Ubelhart, a Bloomberg Intelligence analyst, said in a May 20 report.
Like Caterpillar Inc., which also reported better numbers for the North American construction market this week, Deere is capitalizing on an improvement in U.S. building activity. It predicts global full-year sales from its construction and forestry unit will increase by about 2 percent.
That business saw improved margins in the second quarter after Deere cut costs and paid less for raw materials, said Larry De Maria, an analyst at William Blair & Co.
For all that, construction makes up just 15 percent of Deere’s equipment sales. Its agriculture equipment business, the world’s largest, will see further declines as lower crop prices leave farmers with less to spend. Agriculture sales in the U.S. and Canada are forecast to fall about 25 percent in 2015. Deere now sees full-year equipment-sales dropping 19 percent, from 17 percent previously.
Agricultural machinery inventories have been expanding. Deere Chairman and Chief Executive Officer Sam Allen told analysts on a conference call Friday that Deere plans to reduce output so that it trails demand in 2015, with the hope that supply matches retail demand next year.
“We would expect the outlook, for agriculture especially, to worsen in the second half and into next year,” De Maria said by phone Friday. “But you also have to give them credit for solid operating performance and a nice beat.”
Net income fell to $2.03 a share for the three months through April 30, from $2.65 a year earlier. That’s more than the $1.56 average of 20 estimates compiled by Bloomberg. Equipment sales fell 20 percent to $7.4 billion in the quarter.
Deere rose 4.3 percent to $93.35 in New York, the biggest gain since November 2011.
American construction spending in March was up 2 percent from a year ago, according to government data. Caterpillar reported Wednesday a 3 percent gain in North American retail sales of construction machines in the three months through April, bucking a global decline.