Deere Sees Slump Starting To Ease -- WSJ
November 25 2016 - 3:02AM
Dow Jones News
By Bob Tita
Farm-equipment supplier Deere & Co. easily topped quarterly
sales and profit expectations on Wednesday and said it expects
declining sales of its agricultural machinery will start to ease
next year.
Deere continued to forecast weakening demand in North America
where it dominates the market for large farm tractors and
harvesting combines. But the company sees an upturn in South
America propelled by resurgent sales of farm equipment in Brazil
and Argentina.
Its shares were 11% higher at $102.29 in midday trading on
Wednesday, after earlier notching an all-time high.
Lower prices for farm commodities and a glut of used equipment
have held down demand for new machinery for the past three years.
Farmers have grown increasingly cautious about buying new equipment
following years of elevated demand for equipment when farm incomes
and commodity prices were high.
The Moline, Ill.-based company forecast that sales of its farm
and construction equipment would fall by 1% during the fiscal year
ending Oct. 31, 2017. Wall Street analysts were expecting sales to
drop by about 3% after declining 9.3% to $23.4 billion in 2016. The
company predicted profit next year will be down 1%, following a 21%
decline in 2016 to $1.5 billion.
Sales of the company's farm and landscaping machinery fell 5%
during the fourth quarter from the same period a year earlier to
$4.44 billion, but profit from the business surged 37% to $371
million from a combination of higher prices on machinery and lower
expenses. Deere reported that prices for new and used equipment
firmed in the quarter, taking pressure off dealers to offer
discounts that squeeze margins.
"This happened to be a quarter where we had a lot of little
things that were positives," said Tony Huegel, director of investor
relations, during a conference call.
Income from Deere's financing unit dropped 27% during the
quarter to $164 million, reflecting losses on the sale of equipment
that had previously been leased. Deere has stepped up its leasing
activity in recent years to offset falling sales. Low prices on
used equipment are making it difficult for Deere to recover all of
the leftover costs on leased equipment when farmers return it to
the financing unit. The company said it has raised lease rates to
result in smaller residual values at the end of the leases that are
more in line with used-market prices.
Deere expects retail sales of farm machinery in 2017 to fall 5%
to 10% industrywide in North America, but anticipates about a 15%
increase in industry sales of tractors and combines in South
America, a key growth market for Deere and other farm-equipment
companies.
Deere's construction-machinery business continued to struggle
during the fourth quarter, losing $17 million as sales slipped 5%
to $1.21 billion. The company attributed the loss to higher costs
for production and sales incentives and an impairment charge for
its equipment operations in Brazil and China. Deere said demand for
its construction equipment in the U.S. is being weighed down by
reduced spending by equipment-rental companies and building
contractors. Deere expects sales of its construction and forest
equipment to increase by 1% in 2017.
Deere sidestepped questions from analysts about the effects of
potential tax cuts or trade policy changes anticipated under the
new Trump administration. But Mr. Huegel said Deere executives are
strategizing for a variety of possible scenarios. "At the end of
the day, we want to be prepared for whatever becomes reality," he
said.
In all for the fourth quarter, Deere reported net income of
$285.3 million, or 90 cents a share, compared with $351.2 million,
or $1.08 cents a share, in the year-ago period. Analysts expected
the company to earn 40 cents.
Overall equipment sales fell 5% from last year to $5.65 billion,
better than the $5.38 billion expected by analysts.
--Joshua Jamerson contributed to this article.
Write to Bob Tita at robert.tita@wsj.com
(END) Dow Jones Newswires
November 25, 2016 02:47 ET (07:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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