John Deere & Company (DE, Financial) recently revealed its second quarter results for fiscal 2015 with earnings and revenues beating the consensus estimate although the figures saw a significant year-over-year drop on both counts. The company, whose rivals in the industry include Caterpillar (CAT, Financial), AGCO Corp. (AGCO, Financial), CNH Industrial (CNHI, Financial) and Ingersoll-Rand (IR, Financial), logged earnings of $2.03 a share compared for the quarter, surpassing the consensus estimate of $1.57 a share. However, the figure represents a 23% year-over-year decline in earnings. Following the results, Deere & Co shares rose to $93.54, just a tad lower than the current 52-week high of $93.78.
Dismal farming equipment sales drag revenues
Deere & Co reported 18% year-over-year decline in global sales to $8.17 billion for the second quarter of fiscal 2015. However, the figure managed to beat the consensus estimate of $7.60 billion. Despite a 17% year-over-year drop in cost of sales to $5.69 billion for the quarter, gross profit declined 19.5% to $2.48 billion compared to the year-ago quarter. At the same time, the company saw 12.6% year-over-year drop in SAG expenses, while operating profit declined a massive 31% to $1.09 billion for the quarter.
Segmentwise, Deere & Co saw 20% year-over-year fall in net sales from Equipment Operations, including Agriculture & Turf and Construction & Forestry, to $7.4 billion, with foreign currency headwinds chopping 5% off the total revenue. Operating income at the segment declined 39% year-over-year fall to $828 million on the back of reduced shipments, negative foreign currency headwinds and an unfavourable product mix. Sales at the Agriculture & Turf segment fell 25% to $5.8 billion, while operating profit slumped 48$ to $639 million compared to the prior-year quarter. At the Construction & Forestry segment, sales grew 2% year-over-year to $1.63 billion on the back of greater shipment volumes and higher price realization. Operating profit also climbed by a strong 43% to $189 million as lower SAG costs and higher price realization offset the impact of foreign currency headwinds.
Deere and Co’s Financial Services division saw 14% year-over-year growth to $653 million, with operating profit climbing from $229 million in the year-ago quarter to $265 million in Q2 2015. The segment posted net income of $169.8 million, up from $147.7 million in the year-ago quarter, benefiting from the sale of the company’s crop insurance arm. Region wise, net sales of equipment declined 14% in Canada and the U.S., while sales dropped 28% in the rest of the world.
The year ahead
Following the results, Deere & Co provided an update for its fiscal 2015 guidance. While equipment sales are expected to decline by 19% year over year for the full fiscal 2015, the company sees a 17% decline in sales for Q3 2015. Despite the slowdown in the global farming sector, the company revised its guidance for net income for fiscal 2015 from the previous $1.8 billion to $1.9 billion. However, revenues are expected to fall across all global regions at Deere & Co’s Agriculture & Turf segment commodity prices reduce and farm incomes decline. However, global sales at the Construction & Forestry segment is projected to grow 2% year over year in 2015 as the U.S. economy recovers further and the housing sector sees higher starts. Consensus estimates peg the company’s Q3 earnings to come in at $1.41 a share.
Final thoughts
While Deere & Co surprised the market by posting better-than-expected results for Q2 2015, there is no denying that the company is still grappling with a sluggish global farming sector as well as negative foreign currency headwinds. Farming equipment sales have declined across the globe and are not expected to rise too soon considering dealers already have far too many used high horsepower Deere products in their inventory. Further, with the recent record seed plantings, prices of crops such as corn, soybeans are expected to fall further, reducing the income for farmers. However, Deere & Co is likely to benefit from the recovering construction sector as well as the company’s cost-cutting programs. Experts are looking at an average annual earnings growth rate of over 8% for Deere & Co over the next five years. However, the growth is likely to be gradual, with rewards being reaped only in the long-term. Consequently, the Deere & Co stock currently carries a "hold" guidance.
