Deere Reports Fantastic Fourth-Quarter Results; Outlook Even More Impressive

Farm-equipment maker Deere & Company (DE) reported strong fiscal fourth-quarter results Wednesday that revealed the continued health of the US farmer and demonstrated higher equipment shipment volumes and improved pricing. We’re comfortable with our long-term projections and are maintaining our $82 fair value estimate on the firm. 

Worldwide net sales advanced 20% in its fiscal fourth quarter, as the firm reaped the benefits of rolling out new products and strength outside of the US and Canada, where net sales were up 31% in the quarter. Equipment net sales in the US and Canada jumped 14% during the period. Both paces of growth were lower than the growth experienced for the full year, however. Revenue jumped 18% in its Agriculture & Turf division and 34% in its Construction & Forestry segment. We were pleased with the top-line expansion. 

Deere translated this strong revenue growth into 35% expansion in operating profit thanks to higher shipment volumes and better pricing, which helped to offset a combination of increased raw-material costs, higher expenses related to new product roll-outs, and elevated research and development costs. Operating income increased 31% in its Agriculture & Turf division and 61% in its Construction and Forestry segment. Net income for its equipment operations jumped roughly 55%, as the bottom line benefited from the same operational drivers noted previously and a lower tax rate. The company’s financial services segment also showed signs of improvement, with net income expansion driven by growth in its credit portfolio and lower credit loss provisions. All-in, the firm’s bottom line came in at $1.62, which came in better than consensus estimates.

Looking ahead, management offered a very optimistic forecast. For fiscal 2012, the company expects equipment sales to jump about 15% for the year (and 16% to 18% in the first quarter), while net income is expected to reach $3.2 billion, revealing about 14% growth and above consensus estimates. Industry farm-machinery sales are expected to jump 5% to 10% during the year led by sales of high-horsepower equipment, and the firm noted that farmers in the world’s markets continue to experience strong incomes due to rising demand for agricultural commodities. However, the company did note that it expects industry sales in the EU 27 nations to be relatively flat, a forecast we believe was expected due to the well-documented uncertainty presented by the current sovereign debt problems in the region. Management indicated that sales of Construction and Forestry equipment should grow 16% during the year, with strength outside of the US (including Canada) and increased demand from independent rental companies. Its Financial Services segment will experience a net income decline for the year, however, as the company expects some deterioration in the credit quality of its growing portfolio.  

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