By Angela Chen
Deere & Co. anticipates sales of farm machinery falling by
20% in 2015, as the first major slump in the U.S. farm-machinery
market in a decade draws momentum from lower crop prices and
falling incomes for farmers.
Deere, the world's sales leader in tractors and harvesting
combines, reported a 20% drop in its fiscal fourth-quarter profit
from a year before, with a 32% plunge in income from its
farm-machinery business alone. A steep slide in the cyclical
farm-machinery market has long been anticipated after Deere and
competitors CNH Industrial NV and Agco Corp. benefited from an
extended stretch of elevated machinery demand fueled by rising
consumption of corn by the ethanol industry and generous U.S. tax
breaks for machinery investments.
Falling crop prices, weakening overseas sales and the
curtailment of tax incentives have dampened demand for farm
equipment, particularly for large models in the U.S. and Canada
where Deere dominates the market. Deere predicts U.S. cash receipts
from farming next year will be $391.5 billion, down 5% from its
2014 forecast. Industrywide unit sales of high-horsepower,
two-wheel drive tractors in the U.S. are down 11% in the January
through October period, according to the Association of Equipment
Manufacturers. Sales of harvesting combines are down 21.3% in the
same period.
Deere has slashed production volumes at assembly plants to avoid
a glut of new, unsold equipment at its dealers. The company
anticipates a 20% decline in its farm-machinery sales in 2015,
following a 9% decline in 2014, will be a sufficient reduction in
demand for a sales rebound to begin in 2016.
"Given how we view the market and given where we see things from
a historic basis, our view would be that the risk of [2016 sales]
being down significantly is relatively small," said Tony Huegel,
director of investor relations, during a conference call with
analysts Wednesday.
But some analysts are bracing for a longer slump, especially
since most farmers already are using late-model tractors and
combines, reducing their need to purchase replacements.
"I don't seen a turn in the market as quickly in 2016 as the
company," Stephen Hoedt, a senior analyst with Key Private Bank in
Cleveland. "It's more likely we'll see the market stabilize instead
of rebound."
During the quarter ended Oct. 31, Deere reported that
farm-equipment sales dropped 13% from a year before to $6.17
billion, while operating income plunged 32% to $682 million. For
fiscal 2015, Deere predicted farm-machinery sales would fall 20%
from the $26.4 billion in sales logged this year.
Deere's construction and forestry equipment business offset some
of the decline in farm machinery. Fourth-quarter income from
construction rose 93% from the year before to $228 million, as
sales climbed 23% to $1.87 billion. Construction's operating margin
expanded to 12.1% from 7.7% a year before on higher machinery
volumes and lower overhead costs. Deere attributed the unit's
improvement to a better U.S. economy, a recovering
housing-construction industry and rising overseas sales. Deere
expects sales from the construction business to rise about 5% above
the $6.6 billion in 2014.
Overall for the quarter, the Moline, Ill., company reported
income of $649 million, or $1.83 a share, down from $807 million,
or $2.11 a share, a year earlier. Total revenue, which also
includes the company's finance business, fell 5.1% to $8.96
billion. Analysts had projected expected earnings $1.57 a share
from revenue of $7.75 billion.
For fiscal 2015, Deere forecast a 15% decrease in overall sales
with profit at $1.9 billion, implying earnings per share of $5.35
to $5.50, well short of analysts' expectation of $6.34 a share.
Angela Chen contributed to this article.
Write to Bob Tita at robert.tita@wsj.com
Write to Angela Chen at angela.chen@wsj.com
Access Investor Kit for AGCO Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0010841023
Access Investor Kit for Deere & Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2441991054
Subscribe to WSJ: http://online.wsj.com?mod=djnwires