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Deere takes a hit as farm economy weakens
Moline, Ill. • Deere's profit slumped 15 percent in the third quarter and the farming equipment maker, seeing weak sales ahead, trimmed its outlook and will cut production.
Chairman and CEO Samuel Allen said Wednesday the production cuts will production "in line with demand for our agricultural products."
With commodity prices falling, the U.S. Department of Agriculture in February predicted that farm income in 2014 would sink to levels not seen in four years.
That is cutting into the spending power of farmers and hitting companies like Deere, the world's biggest farm equipment supplier.
Deere is now forecasting equipment sales will fall about 6 percent for fiscal 2014. Its prior guidance was for a 4 percent decline. For the fourth quarter, the company estimates equipment sales will drop approximately 8 percent.
In the U.S. and Canada, agriculture and turf sales are expected to fall approximately 10 percent in fiscal 2014. Sales of tractors and combines in South America are expected to fall about 15 percent, compared with a prior outlook for an approximately 10 percent decline.
Deere now anticipates sales of worldwide agriculture and turf equipment will drop about 10 percent in 2014, lower than a prior forecast for an approximately 7 percent decline. In the third quarter, agriculture and turf sales fell 11 percent.
For the three months ended July 31, Deere earned $850.7 million, or $2.33 per share. That topped expectations of $2.20 per share, according to a poll by FactSet. But that's still down significantly from last year, when the Moline company earned $996.5 million, or $2.56 per share.
Revenue from equipment sales fell to $8.72 billion from $9.32 billion, with equipment sales for the U.S. and Canada dropping 8 percent. Revenue declined to $9.5 billion from $10.01 billion.
"Deere's third-quarter performance reflected moderating conditions in the global farm sector, which have negatively affected demand for farm machinery and contributed to lower sales and profits for our agricultural-equipment business," Allen said. "At the same time, our construction and forestry and financial services divisions had higher profit, showing the benefit of a broad-based business lineup."
Construction and forestry sales rose 19 percent during the quarter.
Ryan Connors of Janney Capital Markets believes that strength in the company's construction and forestry division limited damage to margins.
Yet sluggish global conditions and geopolitical events may continue to pressure sales.
Susan Karlix, manager of the company's investor relations, pointed to declining economic growth near Russia.
"Notably, Western equipment manufacturers are being impacted by the uncertainty from geopolitical issues in the region," Karlix said.
Economic growth is expected to slow in China during the second half of the year, Karlix said.
There are signs, however, of a rebound in domestic markets, with housing sales improving and construction hiring on the rise.
Deere & Co. now anticipates a 2014 profit of $3.1 billion, down slightly from its prior forecast of $3.3 billion.