Deere Takes Haircut on Tractor Trade-Ins Amid Farm Recessionby
Company says it sees higher losses on lease residual values
Net income from finance unit seen 24% lower in fiscal 2016
Deere & Co., grappling with declining sales of its trademark green and yellow tractors, is facing another headwind: losses on customer trade-ins.
The world’s largest agricultural equipment maker is taking a haircut on the value of machines returned at the end of a lease. Deere said Friday on its quarterly earnings conference call with analysts that it’s taking measures to limit the problem by sharing some of the price risk with dealers and customers. Still, such losses may worsen before they improve, spokesman Tony Huegel said.
“They’re taking a haircut,” Larry De Maria, an analyst at William Blair & Co. in New York who has an "underperform" rating on Deere, said by phone Friday. For example, De Maria said, a customer may be guaranteed that a vehicle is worth $50,000 when he returns it at the end of the lease, but the company can only sell it to another party for maybe $45,000.
Deere’s financial services unit, which exists to help finance equipment sales, will see net income drop 24 percent to $480 million in the fiscal year through October, the company said. Deere explained that’s partly due to higher losses on lease residual values, a measure of how much a piece of machinery is worth at the end of a lease.
Deere characterized the downturn in agricultural markets as a “global farm recession” as it cut its full-year earnings forecast. With less income, farmers have curtailed buying new equipment. On top of that, industrywide tractor inventories in North America are now the highest in at least 16 years.
Deere fell 5.5 percent to close at $77.74 in New York.