(DE) Deere & Company 2012 Second Quarter Earnings Preview

Deere & Company (DE) is scheduled to announce its second quarter fiscal 2012 results on May 16, 2012. The current Zacks Consensus Estimate is $2.54 for the quarter, projecting year-over-year growth of 12.06%. The estimates in the current Zacks Consensus range between a low of $2.40 and a high of $2.73 a share. The Zacks Consensus Estimate for revenue is $9.67 billion for the quarter under discussion.

Over the trailing four quarters, Deere outperformed the Zacks Consensus Estimate, booking a positive earnings surprise. The average earnings surprise was 5.21%, implying that Deere has surpassed the Zacks Consensus Estimate by that measure over the last four quarters.

Previous Quarter Recap

Deere’s first-quarter earnings per share (EPS) of $1.30 beat the Zacks Consensus Estimate of $1.23 and climbed 8% year over year, largely driven by strong demand for farm machinery as well as increased sales of construction equipment.

Deere’s worldwide total sales increased 11% year over year to $6.77 billion, beating the Zacks Consensus Estimate of $6.49 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $6.1 billion, an 11% year-over-year increase including a price increase of 4% and an unfavorable currency translation effect of 1%. On a geographical basis, equipment net sales were up 5% in the United States and Canada and 21% in the rest of the world.

Looking Forward

Deere expects equipment sales to grow around 15% in fiscal 2012. The guidance includes an unfavorable currency-translation impact of 3%. Net income is estimated at $3.275 billion. Segment-wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow by 15% for full year 2012, benefiting from favorable global farm conditions. The segment will also gain from the worldwide introduction of advanced new products and major expansion projects particularly in the emerging markets.

Construction and Forestry Equipment sales are expected to improve 18% for 2012, reflecting slightly improved market conditions and activity outside the U.S. and strength in Canada. Construction Equipment sales to independent rental companies are expected to improve further. Sales growth would also emerge from the launch of new products and geographic expansion.

Net income from Financial Services is estimated at $460 million. Region-wise, Deere expects industry farm-machinery sales in the U.S. and Canada to grow 10% for 2012. Western and Central Europe are expected to be flat to up 5%. Sales in the Commonwealth of Independent States are expected to see moderate gains while growth in Asia is expected to be strong. Industry sales of turf and utility equipment in the U.S. and Canada are expected to increase slightly

Estimate Revision Trend  

For the second quarter, only one of the 15 analysts covering Deere has reduced estimate over the past 30 days. For fiscal 2011, only one estimate out of 15 has been trimmed for Deere. There has been no movement in estimates for the second quarter of fiscal 2012 in the past 7 days. The limited number of estimate revisions indicates the absence of any major catalyst driving the quarterly results.

Magnitude of Estimate Revisions

The consensus earnings estimate for the second quarter of fiscal 2012 inched up a cent to $2.54 following Deere’s upbeat first quarter results. There has been no movement since then. For fiscal 2012, the estimate had gone up 23 cents to $8.01 following the results. In the past 30 days the consensus slipped a cent to $8.00. There has been no movement in the past 7 days.

Our View

The United States Department of Agriculture forecasts net farm income to be at $91.7 billion in 2012. It is expecting a record corn crop of 48 million tons this year, up 4.5 million tons year on year and the largest yield in the last 75 years. This bullish trend is seen the world over with global corn production estimated to rise 10% with several countries posting record yield. This will encourage farmers to invest in the latest machinery to maximize productivity, favoring Deere and other companies in this space.

U.S. crop prices will remain strong in 2012 due to vigorous global demand and a tight supply scenario. Additionally, equipment demand will remain strong in FY12. Deere’s equipment demand model depends on current year and prior year cash receipts. U.S. farm cash receipts in 2011 were 16% higher than the previous record of 2008. Therefore, equipment demand in 2012 will rise driven by record farm receipts in 2011 and a comparable pace in 2012.

Besides, Deere has been growing its manufacturing footprint overseas in markets such as China, Brazil, Russia and India. The expansion into the emerging markets should provide long-term growth opportunities. Population growth and rising living standards in the emerging markets are fueling growth in global food demand. In addition to growing its footprint in the overseas markets, Deere is also increasing its focus in the U.S. and Canada. This area generated nearly 60% of total revenues and about 75% of the company’s profit in 2011.

The company currently retains a Zacks #2 Rank (short-term Buy recommendation).

Illinois-based Deere & Co. 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 competes with Caterpillar Inc. (CAT), CNH Global NV (CNH) and Kubota Corporation (KUB).

CATERPILLAR INC (CAT): Free Stock Analysis Report

CNH GLOBAL NV (CNH): Free Stock Analysis Report

DEERE & CO (DE): Free Stock Analysis Report

KUBOTA CORP ADR (KUB): Free Stock Analysis Report

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