The world’s largest agricultural equipment maker, Deere (NYSE:DE), reported its earnings on August 13 and the report was pretty disappointing. The revenue and profits plunged by 5% and 15% to $9.5 billion and $851 million, respectively, in the third quarter. Shares of Deere fell 0.8% in premarket trading as soon as the management lowered their earnings guidance during the earnings call.
Let’s get into how the agricultural and construction segments of Deere performed and what the management outlook is for the remaining fiscal year.
Ag sector under tremendous pressure
After the USDA predicted that crop prices would be lower than expected early this year, the ag honcho started to become cautious of the market conditions and did cut its sales guidance in the last two quarters on the ag sector performance. The ag sector remains underperforming from the last two quarters, and in this quarter the revenue dipped by 11% to $6.97 billion from $7.85 billion reported a year earlier.
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Also the operating profit from this sector remains dim and saw a steep decline of 30% to $941 million from $1.34 billion a year ago. The sharp fall in operating profit was attributable to lower shipment volumes, high production costs related to manufacturing of Tier III and Tier IV ag machinery meeting U.S. emission norms and the foreign currency exchange rate fluctuations.
The future of the ag sector is still under dark clouds, as crop income prospects soften on lower grain prices though livestock prices have started to firm up. The geo-political tension in the CIS countries, coupled with lower ag demand in China could drag the revenue and profits of the ag segment further worldwide. The only positive developmental area is India where government remains supportive of agriculture and sentiments have improved post elections.
Construction segment is looking up
Net sales and profit went up by a whopping 19% and 81% to $1.75 billion and $194 million, respectively. The brisk growth in the operating profit was influenced by higher shipment volumes and price realization and was partially offset by the less favorable product mix. As the construction equipment demand is gradually reviving at the home turf, the ag honcho’s prospects in this segment are turning out to be more promising than predicted.
Also global forestry sales are expected to be up this year due to economic growth and improved sales in Europe.
Management has become over-cautious
Due to the promising future of the C&F segment, the management has maintained its sales guidance at 10% increase for the entire fiscal year with respect to the segment. However, the detoriating ag sales in home turf as well as several other countries worldwide has coerced the management to lower its guidance further from 7% to 10% down in the fiscal year.
The management has reduced its overall sales guidance from 4% to 6% down in the entire fiscal year after the third quarter earnings call.
Also due to weak ag demand, the management has forecast net income for the fiscal year to stand at $3.1 billion, the earlier forecast being $3.3 billion.
Samuel R. Allen stated in the third earnings call, “Deere's third-quarter performance reflected moderating conditions in the global farm sector, which have negatively affected demand for farm machinery and contributed to lower sales and profits for our agricultural-equipment business. “
Referring to his words, it might be concluded that the ag segment is the chief drag as of now, but as Deere operates in cyclical industries, it might pull up its socks when the economic conditions prevailing in the ag markets improve over time. On the contrary, the construction segment is like the savior for Deere’s sustaining its revenue and profits at least at a decent level. Let’s hope that the ag segment revives as soon as possible, and till then the C&F segment will continue to remain the most important with all investors’ eyes watching its move all the while.