Deere Profit Forecast Tops Estimates as Crop Prices Slump

  • Shares gain after fiscal fourth quarter profit tops estimates
  • Equipment sales will decline for a third straight year

Deere & Co., the world’s largest farm equipment manufacturer, forecast fiscal 2016 profit and posted fourth-quarter earnings that beat analysts’ estimates even as lower crop prices reduce the money that growers have to buy tractors and combines.

Net income for the year through October will be about $1.4 billion, the Moline, Illinois-based company said Wednesday in a statement. That was better than the $1.39 billion average of 18 estimates compiled by Bloomberg. Equipment sales will be down for a third year, falling about 7 percent, the company said.

“It looks like a big beat,” Stephen Volkmann, a New York-based analyst for Jefferies & Co. who recommends holding the shares, said in a telephone interview on Wednesday.

Net income in the fiscal fourth quarter fell to $1.08 a share from $1.83 a year earlier, the company said. That’s more than the 75-cent average estimate. Equipment sales fell 26 percent to $5.93 billion, missing the $6.13 billion average estimate.

Cost cuts and inventory reductions over the last two years are helping the company’s margins moving forward, he said. Still, the “fundamentals of the business haven’t changed,” he said.

Cash Receipts

Deere rose 4.7 percent to $80 in New York, the biggest gain since Oct. 5. The stock has dropped 9.6 percent this year.

The initial gain may be mostly from short covering, Larry De Maria, a New York-based analyst for William Blair & Co. who recommends selling the shares, said in a report on Wednesday. A short position is the sale of a borrowed security with the expectation that the asset will fall in value.

The decline in prices for corn to soybeans has spurred farmers to cut back on purchases. U.S. farm cash receipts, a key indicator for equipment sales, will fall 8.2 percent in 2015 from a year ago to $394.7 billion and will be little changed in 2016, Deere said.

Sales of large, expensive agricultural machinery are down and inventory remains above historical averages, portending more production cuts in 2016, according to Karen Ubelhart, a Bloomberg Intelligence analyst.

“Weak finances should restrain farmers’ equipment buying again in 2016,” Ubelhart said in a report on Wednesday.

Tractor Sales

Industry sales for agricultural equipment in the U.S. and Canada will fall 15 to 20 percent for 2016 and as much as 5 percent in the European Union, Deere forecast. In South America, industry sales of tractors and combines will decline 10 to 15 percent and Asian sales may be little changed to slightly lower due in part to weakness in China, the company said.

“Although our forecast calls for lower results in the year ahead, the outlook represents a level of performance that is considerably better than we have experienced in previous downturns,” Samuel Allen, Deere’s chairman and chief executive officer, said in the statement. 

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