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Agriculture market is ‘nearing bottom,’ Deere says

Monday, February 20, 2017 23:01
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Deere is seeing signs of stabilization in key agriculture markets, including strong growth from Brazil, the farm machinery giant said Friday.

Meanwhile, the used equipment market appears to be leveling off, fueling the company’s more optimistic outlook for the current fiscal year.

Deere raised its revenue guidance for fiscal 2017 to an expected 4 percent increase, compared with the 1 percent decline it forecast back in November.

 

“There are signs the large ag market is nearing bottom,” Josh Jepsen, Deere’s manager of investor communications, said on the company’s first-quarter earnings call Friday.

The U.S. agriculture market has been struggling since 2012 due to low commodity prices for key crops such as corn, which has weakened farmer incomes. It also has led to a continued slump in farmland prices.

But trends appear to be improving. Along with its improved revenue outlook, Deere lifted its full-year net income forecast by $100 million. The new projection of $1.5 billion is significantly ahead of analysts’ consensus estimate of $1.3 billion.

The updated forecast implies earnings per share of $4.75 versus $4.40 previously, Jefferies analyst Stephen Volkmann said. Thomson Reuters had pegged Wall Street’s consensus estimate at $4.53 per share.

Deere shares were up about 3.5 percent premarket, but lost steam and shortly turned lower. They were last trading hands fractionally higher, at $109.65. The stock is up more than 30 percent over the past 12 months.

By segment, the company sees full-year worldwide sales in the agriculture and turf equipment business increasing by about 3 percent, compared with a 1 percent decline previously expected. Improvement in Brazil is one of the big reasons for the improved outlook.

“Profitability for Brazilian farmers remains at good levels as crops are sold in dollars,” Jepsen said. Fundamentals in the country are improving, with the crop value of agriculture production expected to increase about 8 percent in U.S. dollar terms due to record acreage and expected yields.

Also helping is more budgeting for government-sponsored financial programs in the country’s agriculture sector. Brazilian crops are becoming more competitive with the U.S. agriculture industry.

Within the U.S. and Canada, however, Deere still expects agriculture and turf retail sales t be tough, falling 5 to 10 percent in 2017. That’s unchanged from its prior guidance. But South America agriculture sales are forecast to increase by 15 percent to 20 percent, compared with the prior guidance for about 15 percent growth.

Deere Chief Financial Officer Rajesh Kalathur indicated there’s “also more enthusiasm in Argentina and a little bit more in Mexico.”

As for Europe, Jepsen said economic growth in the region is showing improvement “at a moderate pace.” But he added that “geopolitical risks such as Brexit and populous sentiment remain elevated, as does currency volatility.”

Deere indicated that Asia sales of agriculture and turf in 2017 are projected “to be flat to up slightly, with growth in India being the main driver.”

Elsewhere, Deere said the company’s construction and forestry segment is seeing “a slight improvement.” Worldwide segment sales are forecast to rise about 7 percent for 2017, better than earlier guidance for a roughly 1 percent increase.

For the fiscal first quarter ended Jan. 29, Deere reported earnings of 61 cents a share, down about 24 percent from 80 cents a share a year ago. Still, that was above the 55 cents per share consensus estimate from Thomson Reuters. The company said a higher tax rate in 2017 reduced quarterly results.

Net sales of the equipment operations were $4.7 billion, down 1 percent from a year ago.

By segment, worldwide agriculture and turf sales were unchanged for the quarter. Operating profit in the segment was up about 48 percent, driven mainly by a gain on the sale of a partial interest in a landscape supply business and partially offset by an employee-separation charge.

The construction and forestry segment’s global sales in the quarter fell 6 percent. Operating profit in the segment dropped 51 percent, reflecting higher sales-incentive expenses and the company’s voluntary employee-separation program.

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