When the largest ag equipment maker of the U.S., John Deere (DE, Financial), posted its fourth quarter numbers on November 26, all eyes were glued to the report card as analysts’ were expecting drastic falls in both top and bottom lines of the equipment major as its presently facing severe headwinds in the agricultural equipment division which has been contributing majorly to the total revenue. However, the report was not as dim as expected and Deere performed better in terms of the Street expectations. But as the headwinds seem to be persistent through the fiscal year, the company has taken a cautious stand and has reduced its earnings guidance for the next fiscal year. The weak outlook for the Q1 of FY2015 overshadowed the good portion of the earnings report, and thus the stock slipped more than 2.5% after the release during the day. Let’s dive in and find out the performance of Deere in the fourth quarter vis-à -vis the Street estimates, and also take a sneak peek into the future outlook provided by the company. But, first let’s take a quick glance at the quarter numbers.
A brief look at the quarter’s number mix
Worldwide revenue slipped about 5% to $8.965 billion for the fourth quarter, compared to $9.451 billion reported a year ago. Net income for the fourth quarter also dipped by a whopping 20% to $649 million, from $807 million reported in the final quarter of the previous fiscal year. However, the earnings per share which dipped 13% for the fourth quarter year-over-year to $1.83 per share from $2.11 per share did beat the analysts’ earnings expectations of $1.58 a share.
In fact, the year-over-year decline in revenue was mainly due to the bumper corn harvest that pushed the prices down this quarter thus leaving farmers with little cash to buy the high-range ag equipment. This did not bode well for the equipment major which saw equipment sales decline 7% for the quarter and 6% for the full-year. Equipment net sales in the U.S. and Canada decreased 10% for the quarter and 8% for the year. Outside U.S. and Canada, net sales were down 2% for the quarter and down 3% for the year, with unfavourable currency-translation effects of 2% and 1% for these periods.
During the earnings call, CEO, Samuel R. Allen, stated, “John Deere has completed another year of solid performance in spite of weaker conditions in the global farm sector, which caused sales and earnings to decline from the record totals of 2013. … Nevertheless, our success managing costs and assets and establishing a broad-based business line-up has allowed us to deliver strong results and remain in a sound financial condition.”
Ag sector woes keep piling up
The gloom in the U.S. agricultural sector has been taking a toll on Deere’s top-line growth for the past few quarters, and this was evident in this quarter as well. Ag equipment sales plunged 13% for the quarter and 9% for the full year largely due to lower shipment volumes, the previously announced sales of the company’s landscapes and water operations, and the unfavorable effect of currency translation. Higher production costs primarily linked to engine emission programs, increased warranty costs and lower shipment and production volumes served as a drag on the ag operating profit which declined 32% to $682 million from $996 million, reported a year earlier.
As grain prices continue to tumble down further while the average input costs tend to remain higher, farm income has come under stress and thus farmers are facing cash constraints, thus leading to lower ag equipment sales for Deere. Unfortunately, the management have accepted that this declining trend is likely to continue into the next fiscal year and have provided a bearish outlook with respect to ag equipment sales for the coming fiscal year. Deere now expects global sales of ag and turf equipment to drop 20% in the next fiscal year.
Regionwise, it expects ag equipment sales to be down by a whopping 25%-30% in U.S. and Canada, down by around 10% in Europe and South America, and down slightly in Asia-Pacific for the coming full-year. For the CIS countries, as economic revival is slow and continued tensions in Russia and Ukraine persists, Deere expects further deterioration in ag equipment sales in the region going forward into the next fiscal year.
Construction remains the sole bright spot
In the entire earnings report of Deere, if there was some relief factor, it was in the construction segment’s number mix which was pretty interesting and positive. Construction and forestry sales improved 23% for the quarter to $1.87 billion from $1.52 billion reported a year ago. Operating profit showed a dramatic improvement of 93% year-over-year to $228 million from $118 million in the final quarter of the prior fiscal year. Higher shipment volumes and lower selling and general expenses has been the chief driving forces behind the growth in sales and operating profit in the segment.
Its best to keep the readers reminded that as the construction sector in U.S. and Europe has started looking up, it has given impetus to the construction equipment sales for Deere. Hence, the construction segment numbers did partially offset the drag created on total revenue and net income by lower ag equipment sales.
The management has forecasted that the construction equipment sales momentum will continue into the next fiscal year with the equipment sales in this segment projected to grow nearly by 5% on a global basis.
Cash position is firm, investors well-rewarded
Deere has maintained a healthy flow of cash in the past, and that is well reflected in the dividend pay-out which has continued as a regular stream for investors, even when the ag sector faces a severe slump. In this fiscal year, the company was able to generate $4.5 billion as operating cash flow; much ahead of the management’s forecast of $3.7 billion for the year.
Deere has successfully returned around $3.5 billion cash to the investors through share repurchases and dividends. The company projects the next year cash flow to be around $2.9 billion, given the fact that the ag sector slump is bound to continue or maybe even worsen further in the coming year.
Last word
The ag equipment honcho is under immense pressure as the ag sector does not seem to be looking up even in the coming year, but as it’s a well-diversified company, the construction equipment sales will act as a boost to both its top and bottom line in the coming quarters. Also, the company’s solid cost-cutting strategies will aid in growing the bottom-line or at least will aid in maintaining it at a decent level. So, investors should stay tuned as they will reap benefits in the short as well as the long term.
