Deere & Co.’s earnings report surprised more than a few analysts, but many aren’t buying into the company’s forecast for the year ahead, though it’s lower than their fiscal 2013 results.

Last week, November 20, Deere reported that its equipment operations recorded an operating profit of $1.114 billion for the fourth quarter and $5.058 billion for the full year, compared with $1.051 billion and $4.397 billion in 2012. Net income of the company’s equipment operations was $650 million for the fourth quarter and $2.974 billion for the full year, compared with $576 million and $2.616 billion in 2012.

At the same time, in its outlook for fiscal year 2014, the company says it could see its first drop in annual earnings in 5 years, largely due to a declining ag equipment sales. In addition to falling commodity prices (Chicago corn futures down 50% since hitting a record high in August 2012), Deere also dropped its forecast in U.S. farm cash receipts for 2014 to $377.7 billion from $391.8 billion in 2013.

In a note to investors, Steven Fisher, analyst for UBS, said Deere reported 4Q above expectations, driven by ag and turf operating margins. “Ag and turf and construction and forestry segment sales were each 1% higher than our estimate, but ag and turf operating profit was 11% higher than UBS estimates, with operating margin of 14% ahead of UBS estimates 12.7%.”

According to Fisher, Deere’s initial fiscal year 2014 implies a 6.7% decline vs. 2013 results. “Deer’s guidance reflects 2014 ag and turf equipment sales down 6%, including the sale of 60% of JD Landscapes, and assumes a 5-10% decline in the North American ag industry sales, driven by declining high horsepower tractor and combine sales. Deere also expects EU industry sales down about 5% and South America down 5-10% in 2014. The ag decline is partially offset by an expected 10% increase in construction and forestry sales.”

Optimistic Outlook?

But Fisher says the company’s outlook may be optimistic. “Net income guidance is above the Street and UBS estimates, but we believe it may represent a best-case scenario. We estimate North American ag equipment sales to decline 10%, and given recent channel checks with key farmers/bankers/insurers/dealers, we believe a 10% decline may prove optimistic.”

RW Baird’s Mircea (Mig) Dobre also sees strong headwinds ahead for ag equipment sales in 2014. In a note, he said, Deere’s beat of analyst estimates was driven by strong margin performance. “2014 guidance was better than most feared, with core sales flat (ag and turf down 2%) and net income down mid-single-digits. Pricing is expected to contribute +2%, which could prove difficult to achieve given expected volume declines in ag. Declining commodity prices and crop receipts — now for the second year in a row — combined with a relatively young equipment fleet underline the risks to our forecast and management’s guidance.”

Deere & Co.’s outlook for fiscal year 2014 is as follows:

U.S. & Canada Ag   Down 5-10% EU 28 Ag  Down about 5% South America Ag Down 5-10% CIS Countries Ag  Down slightly Asia Ag Up slightly U.S. & Canada Turf & Utility Equipment Up about 5%

The following data from Deere’s conference call with analysts shows the basis for the company’s 2014 outlook.

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