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Feb 16, 2018

Deere raises sales forecast amid signs of farm recovery

Deere & Co

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Deere & Co., the world’s largest farm machine maker, raised its full-year sales forecast, and there’s reason to believe that good news will keep coming.

After a prolonged slump for crop prices that slashed farmer income, fundamentals are starting to rebound, according to Farha Aslam, an analyst at Stephens Inc. There’s a chorus echoing that view. Bunge Ltd. Chief Executive Officer Soren Schroder said this week that there are early signs of a recovery for the markets. An index measuring sentiment in rural agricultural communities rose to the highest since 2014 in February, while a Federal Reserve Bank of Kansas City report showed farmland prices are starting to stabilize.

Green shoots for the farm economy can only help Deere, which is already on an upswing as corporate farmers begin to replace older equipment. Cuts to inventory and output during the downturn are now adding to the company’s positive outlook as it produces more of its iconic green-and-yellow machines to meet demand.

A turnaround in the farm economy “would kick-start demand to an even greater extent,” said Matt Arnold, an analyst with Edward Jones & Co. in St. Louis. Sentiment in agriculture “can change on a dime. A weather event could prompt an upswing in grain prices and income, and it’s been a long time since we’ve seen one of those.”

Deere said Friday in a statement that equipment sales are projected to increase by about 29 per cent in the financial year that lasts through October, and by as much as 40 per cent in its fiscal second quarter.

It also said net revenues will increase by about 25 percent in fiscal 2018, up from a prior view of about 22 per cent. It forecast full-year net income, excluding the impact of tax-related adjustments, of $2.85 billion. That exceeds the average estimate of 18 analysts surveyed by Bloomberg for $2.7 billion.

The company reported a surprise first-quarter loss of $535 million, which included the writedown of net deferred tax assets following U.S. taxation reform.

“Although net income for the quarter and full year are being affected by the upfront costs of U.S. tax reform legislation, we believe the changes will reduce the company’s overall tax rate and be beneficial in the future,” said Deere CEO Sam Allen said in the statement.

Outside of agriculture, Deere expanded its construction equipment unit last year with the acquisition of Wirtgen Group, a roadbuilding company, amid a global boom in building. Deere’s construction and forestry segment saw a 57 per cent increase in sales in first quarter.

“The construction business is low-margin for Deere, so wasn’t meaningful to earnings in the past,” said Karen Ubelhart, an analyst for Bloomberg Intelligence. “But now it is,” given the Wirtgen acquisition.

Deere shares rose 1.6 per cent to US$169.50 at 7:40 a.m. before the start of regular trading in New York.

Other highlights from the earnings report:

-Worldwide sales of agriculture equipment are forecast to increase by about 15 per cent for the 2018 fiscal year.

-Industry-wide, agricultural equipment sales in the U.S. and Canada will rise 10 per cent, and gain about 5 per cent in the European Union due to improving conditions in the dairy and livestock sector

-South American sales of tractors and combines across the industry will increase as much as 5 per cent, driven by Argentina

-Deere’s financial services arm is expected to bring in net income of US$840 million for the year, of which US$320 million is attributable to changes brought on by tax reform.