John Deere & Company (DE, Financial) is scheduled to report its second quarter results for fiscal 2015 on May 22. The company represents farm and construction machinery on the Standard & Poor 500 Index and its results possibly impacting futures trading as well as other industry peers such as Caterpillar (CAT, Financial), AGCO Corp. (AGCO, Financial), CNH Industrial (CNHI, Financial) and Ingersoll-Rand (IR, Financial).
Deere & Co reported a drop in first quarter earnings for fiscal 2015 as the company continued reeling under the impact of a sluggish global farming sector resulting in reduced demand for agricultural equipment. While revenues dropped 17% year-over-year to $6.38 billion, net income plunged 43% from $681.1 million or $1.81 a share in Q1 2014 to $386.8 million or $1.12 a share. Although both revenue and earnings for the quarter beat expert estimates, the company’s revised guidance of a net income of $1.8 billion, down from its earlier guidance of $1.9 billion for the full-fiscal 2015 and forecast of a 19% year-over-year decline in sales during the second quarter did not go down well with investors. Shares of Deere & Co are down 1.5% since the company’s last earnings report.
Revenues Likely to Sag Owing to Sluggish Farming Sector
With an enduring slowdown in the global economy as well as the farming sector, Deere & Co’s woes are not likely to lift in the second quarter of fiscal 2015. As farmers continue to find them being squeezed by the declining price of commodities such as soybeans and corn, resulting in less cash on hand to buy new equipment, experts are foreseeing lower shipment volumes for Deere in the quarter. To add to this, the corn market is also continuing to decline at a steady pace, falling to new seven-month lows earlier this month. Even the company’s dealers acknowledge the presence of far too many used high horsepower Deere tractors in their inventory, an aspect that is likely to have affected new tractor sales not only in Q2 2015 but also for the foreseeable future.
While sales of farm equipment is expected to fall across the globe, Deere & Co expects maximum decline in the US and Canada by 25% to 30% followed by 10% in Europe. Further, although economic recovery in the US was expected to push sales of construction and forestry equipment in the second quarter, sales might not have taken off the way Deere & Co had anticipated. Further, Deere & Co is likely to see 4% drop in revenues from equipment sales in the second quarter and 3% for the full fiscal owing to the enduring negative foreign currency headwinds.
In a bid to offload non-core operations and narrow its focus to businesses like farm machinery, technology and services, Deere & Co also completed the sale of its crop insurance business, including both John Deere Insurance Company and John Deere Risk Protection Inc. to Farmers Mutual Hail Insurance Company of Iowa (FMH). Although the divesture is not likely to have an impact on Q2 results, experts look at it as a positive step to curb future losses.
Final Thoughts
John Deere & Co. posted better-than-expected first quarter earnings, although earnings and revenues declined significantly on a year-over-year basis. Investors were also disappointed with the company’s downbeat guidance for the remainder of the fiscal year. More recently, JP Morgan (JPM, Financial) downgraded Deere & Co to Underweight from Neutral and lowered its price target from $90 to $84, sending the company’s shares on a downward spiral. Consensus is down from $1.71 three months ago to $1.57 a share on revenues of $7.53 billion, representing an 18.5% year-over-year decline. Although the company has beaten the consensus estimates in the last four quarters variably by 13 to 54 cents, Deere & Co probably needs to report earnings of above $1.68 on revenue of at least 7.8 billion for a favourable reaction from investors. The Deere & Co stock has been trapped between $80 and $95 for several years now, as management grapples with slowing demand. The Deere & Co stock carries a price estimate of $89.3 a share, and a ‘hold’ guidance.
