KUBTY Kubota Corporation (PK)

Shares of agricultural, forestry and construction equipment manufacturer Deere & Company (DE) gained 2% since its announcement of mixed retail sales for November on Dec 10. Sales in utility and row crop tractors outperformed the industry, while sales for four-wheel drive tractors and combines failed to match the industry performance. Deere’s reported inventory levels were lower than the industry for all its product segments.

November Retail Sales Performance in Detail

In the agriculture and turf segment, Deere’s U.S. and Canada utility tractor sales growth went up by single digits in November, on contrary to the industry-wide sales decline of 3%. Deere’s inventory was reported to be lower than the industry-wide inventory of utility tractors, which stood at 50% of the previous 12 months' sales.

Sales of row crop tractor went up by double digits, outperforming the industry growth rate of 7% during the month. The industry inventory of row crop tractors were 33% of the previous 12 months' sales and Deere’s inventory of row crop tractors was lower than the industry inventory.

Sales of four-wheel drive tractor sales decreased in single digits in November, in stark contrast to the 2% growth witnessed across the industry during the month. Deere’s inventory for the four-wheel drive tractor was lower than the industry inventory at 25% of the previous 12 months' sales.

Combine sales went up in double digits, but failed to match the 26% growth across the industry. Deere’s inventory for the combines was lower than the industry inventory at 17% of the previous 12 months' sales.

Retail sales of selected turf and utility equipment were flat year over year in November. In Europe, retail sales of tractors were down in single digit, while combine sales were down by double digits year over year. Coming to the Construction and forestry segment, sales went up in single digits both on a “First in Dirt” basis (retail sale of a new unit plus first use of a new rental unit) and on a settlement basis (retail sale of a new unit plus conversion of rental unit to a retail sale).

Deere’s Q4 Sales Performance and Expectations

Deere’s worldwide total sales decreased 3% year over year to $9.45 billion, beating the Zacks Consensus Estimate of $8.8 billion.  Agriculture and Turf equipment sales decreased 4% and Construction & Forestry sales dipped 8%.

Deere expects equipment sales to decrease around 2% year over year for the first quarter of fiscal 2014. For the full year, the company continues to expect equipment sales to decline 3%.

Region-wise, Deere expects that industry farm machinery sales in the U.S. and Canada will decline 5% to 10% year over year in fiscal 2014. In Europe, sales are projected to be down 5% due to continued deterioration in the overall economy, lower commodity prices and farm incomes.

The company foresees global sales for Construction & Forestry equipment to advance about 10%, partly because of the recovery in the U.S. economy and an increase in housing starts.

Peer Performance

Deere’s performance was better than that of Caterpillar Inc. (CAT). According to the last published data, sales growth for the construction and mining equipment continued to be in the red with a decline of 12% in October, the eleventh consecutive month of decline.

Our Take

Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Even though U.S Departement of Agriculture projects record net farm income for CY2013, farmer sentiment regarding capital goods purchases is becoming more conservative due to lower commodity prices. Deere will nevertheless benefit from recovery in construction sector. However, continued weakness in the European markets remains a concern.

Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells products in the U.S. and Canada through branch offices as well as through distributors and dealers for the resale of products internationally.

Deere currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the machinery-farming sector include Kubota Corp. (KUBTY) and Alamo Group, Inc. (ALG). While Kubota carries a Zacks Rank #1 (Strong Buy), Alamo holds a Zacks Rank #2 (Buy).

 
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