Deere & Co. (DE) issued record fiscal first-quarter earnings Wednesday as the firm continues to capitalize on the world’s growing need for food, shelter and infrastructure. We’re comfortable with our long-term projections for the farm-equipment maker and are sticking with our fair value estimate.
Worldwide net sales advanced 11% during its fiscal first quarter buoyed by pricing increases of 4%. The company’s Agriculture & Turf segment sales increased 8%, while its Construction & Forestry segment’s revenue climbed 22%. Strength came mostly from outside the
Deere’s equipment operations reported an 8% increase in operating profit, to $698 million during the period, as increased production expenses and higher raw-material costs prevented sufficient leveraging of the higher sales pace. The firm’s operating profit in its Agricultural & Turf segment nudged up less than 3%, while operating profit in its smaller Construction & Forestry segment advanced more than 40% from the year-ago quarter. Deere’s financial services operating profit was essentially flat from the same period a year ago as higher overhead and insurance claims offset growth in the portfolio and a better assessment of customer credit quality. Overall, operating profit increased about 6.7%, net income increased a modest 3.7%, and diluted earnings per share jumped a dime from the year-ago quarter, to $1.30 (consensus was at $1.24 per share).
Looking ahead, the company expects revenue to expand 15% during fiscal 2012 and net income to be about $3.275 billion (up from $3.2 billion previously and ahead of consensus estimates), two targets we think are achievable. Deere expects worldwide sales of agriculture and turf equipment to increase about 15% for the year as the company benefits from strong farm incomes and new product launches. However, it did note that total farm receipts in 2012 will be slightly lower than levels it previously had expected. Deere thinks worldwide sales of construction and forestry equipment will rise about 18% during the year and net income from its financial services segment to fall due to higher expected provisions for credit losses. Importantly, growth in its equipment operations represents an acceleration of the pace achieved during the first quarter. Though we were pleased with the performance and rosy outlook for agricultural equipment demand, we think the tractor-maker’s shares have only modest valuation upside from these levels.