Deere & Co. is slated to release its third-quarter 2010 results on tomorrow, Wednesday, August 18, 2010. The current Zacks Consensus Estimate for the second quarter is $1.22, representing annualized growth of 23.18%.
In the previous quarter, Deere delivered an earnings surprise of 44.9%, maintaining its trend of outperforming the Zacks Consensus Estimate in the past three quarters. The four-quarter average earnings surprise came to a whopping 169.66%.
Fiscal Second Quarter Performance
Deere delivered earnings per share (EPS) of $1.58 for its fiscal second quarter ended April 30, substantially ahead of the Zacks Consensus Estimate of $1.09 and the year-ago result of $1.11. The second quarter's earnings excluded a tax charge of 30 cents per share related to the U.S. health-care legislation.
The 42% year-over-year growth in the quarter marked an awesome improvement over the 18.8% earnings per share growth delivered in the first quarter of 2010 and double-digit declines in 2009. The bottom-line improvement was due to rising profit margins on growing production volumes and improving demand for construction equipment.
Deere's worldwide total sales increased 6% year over year to $7.1 billion, striding ahead of the Zacks Consensus Estimate of $6.9 million, a surprise of 3.52%. Net sales of equipment operations were $6.5 billion, a 6% year-over-year increase including a favorable currency translation effect of 4% and a price increase of 2%. On a geographic basis, equipment net sales were up 4% in the United States and Canada and 9% beyond.
Segment-wise, Construction & Forestry led the growth with sales soaring 52% year-over-year, driven by higher shipment volumes, favorable currency-translation effects and improved price realization. The segment posted an operating profit of $36 million, reversing a loss of $75 million in the year-ago quarter driven by the above-mentioned factors, which were partially offset by higher post-retirement benefit costs.
Agriculture & Turf sales increased 1% year over year as favorable effects of currency translation and improved price realization were partially offset by lower shipment volumes. Operating profit rose 35% to $952 million due to improved price realization, higher production volumes, favorable effects of foreign exchange and lower raw-material costs, partially offset by higher post-retirement benefit costs.
Financial Services revenues remained flat at $556 million. Segment net income increased 26% to $86.9 million. Improved financing spreads, a lower provision for credit losses, growth in the credit portfolio and higher commissions from crop insurance were partially offset by lower tax credits related to wind energy projects and higher selling, administrative and general expenses.
Outlook
In its second quarter earnings call, Deere raised its fiscal 2010 net income expectation to $1.6 billion from its previous projection of $1.3 billion. Net income from credit operations for the full year is expected to be approximately $300 million, compared with its previous estimate of $260 million.
For the third quarter of fiscal 2010, Deere expects equipment sales to be up in the range of 21%–23%, including a favorable currency translation of 2%. For the full year, sales growth is expected in the range of 11%–13%, including a favorable currency translation of 3%.
The Zacks Consensus Estimate for revenue is currently at $6.8 billion for the third quarter and $26.9 billion for fiscal 2010 with annualized growth rates of $15.8% and 16.2%, respectively.
Estimates Revisions Trend
Estimates have showed an upward trend in the last 30 days, signifying that analysts have an upward bias on Deere. The earnings outlook for Deere thus looks promising and we expect Deere to maintain its earnings surprise streak. We are encouraged by the fact that both the third quarter and full year estimates are on an uptrend, implying that analysts see positive catalysts.
Agreement of Estimate Revisions
Out of the 20 analysts providing estimates, four have raised them for the upcoming quarter over the last 30 days, with 3 analysts making positive revisions over the last week. For fiscal 2010, four of the 22 analysts providing estimates lifted their forecasts in the last 30 days, three of which were raised in the last 7 days. Even though the percentage of analysts revising their estimates is low, it is to be noted that the analysts are in unison as there have been only upward revisions of estimates.
Analysts believe that Deere will revise its fiscal 2010 guidance upwards when it reports its earnings. They expect the upside to be driven by steady strength in the key North American market, improvement in Europe and a strong outlook for the Construction and Forestry segment.
Magnitude of Estimate Revisions
Overall, estimates for the third quarter have climbed 30 cents from 92 cents per share 90 days ago to the current $1.22 per share. Of the increase, a 29-cent jump came after the second-quarter earnings release with estimates increasing from 92 cents to $1.21. Over the past 30 days, estimates have inched higher by 2 cents and by 1 cent in the last week. The current Zacks Consensus Estimate for the third-quarter of $1.22 per share represents a 24.2% year-over-year growth over the 99 cents reported in the year-ago quarter.
The current Zacks Consensus Estimate for fiscal 2010 is $4.18, an increase of 47.2% over 2009 levels, reflecting the company's strong earnings profile. For fiscal 2010, estimates have gone up significantly by 94 cents from $3.24 per share 90 days ago to the current $4.18. After the second quarter earnings announcement, estimates jumped 92 cents. There has been a 2-cent increase over the past 30 days.
The increase in estimates after the earnings call was driven by expectations of improved outlook for farm equipment, pre-buy in anticipation of higher equipment prices next year due to new emission regulations, strong cost control across its businesses, solid pricing and an improved outlook for the Construction and Forestry segment. Thereafter, Deere's strong June sales were instrumental in lifting earnings estimates.
Our Take
Equipment demand is expected to remain strong in 2010 as many farmers want to beat the potential price increase on the Tier 4 emission models coming in 2011. Tier 4 interim is the EPA Emissions Standard coming into effect on January 1, 2011 and all machines built after January 1, 2011 in the U.S. must be Tier 4 interim compliant.
The Agriculture & Turf segment, which is the major contributor to revenue, continues to witness growth largely due to U.S. professional farming and resurgence in South America. Brazil is receiving support from favorable prices for soybeans and sugarcane and from attractive government-supported financing. The farm economy in Argentina is benefiting from commodity prices and a return to more normal weather conditions.
Russia, one of the key global producers of wheat, has been experiencing a severe drought this year, causing the government to suspend exports of wheat. Consequently, there has been a hike in wheat prices. Wheat accounts for over 40% of the harvested area in Europe. Weather conditions in Western Europe being more favorable have led farmers to benefit from higher prices. Western European agriculture represents approximately 15% of Deere's sales and it should benefit from this trend.
Rental companies, which account for approximately 50%-70% of Deere's Construction and Forestry segment's demand, have aging fleets. The pent-up replacement demand has led to strong second quarter results at other construction equipment suppliers and we expect the same from Deere.
We currently have a Zacks #2 Rank (short-term 'Buy' recommendation) on the shares. We maintain our long-term Outperform rating on Deere.
Performance of Competitor
Deere's competitor Caterpillar Inc. (CAT - Analyst Report) reported EPS that more than doubled to $1.09 in the second quarter ended June 30, 2010 from 50 cents in the first quarter, marking one of the most stellar increases in the company's history.
The company topped the Zacks Consensus Estimate by 24 cents and was up 82% from 60 cents in the year-ago period. The outperformance was driven by improved demand across all regions, particularly in developing economies. Revenues in the quarter were $10.4 billion, a 31% jump from $8 billion in the year-ago period.
Moline, Illinois-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company currently reports operating results under three major business segments - Agriculture and Turf, Construction and Forestry and the Credit segment.
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