Shares of Deere & Company (DE), producer of agricultural and forestry equipment and construction equipment, went up 1% following the announcement of above-industry March sales growth across the board.
To elaborate, in the agriculture and turf segment, Deere’s U.S. and Canada utility tractor sales growth were in the double digits in March, outperforming the industry wide sales growth of 8%. 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 were also higher than the industry growth rate of 28% during the month. The industry inventory of row crop tractors were 30% of 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 increased by a single digit in March, in stark contrast to a decline of 5% witnessed across the industry during the month. Deere’s inventory for the four-wheel drive tractor was in line with the industry inventory at 21% of previous 12 months sales.
Combine sales recorded an impressive growth in triple digits pitted against 67% growth in the industry. However, retail sales of selected turf and utility equipment were down in the double digits. In Europe, retail sales of tractors were down double digits while combine sales went up by a single digit.
Compared with the company’s performance in February, sales for utility tractor, row crop tractors and combines fared better while sales for four-wheel drive declined. In Europe, tractor sales declined given a single digit increase recorded in the previous month while combine sales fared better than the decline in low double digits last month.
Coming to the Construction and forestry segment, sales went up in the double digits, much better than single digit growth in Feb.
In the first quarter of fiscal 2013, Deere’s worldwide total sales increased 10% year over year to $7.42 billion. The Agriculture & Turf segment’s sales increased 16% to $5.49 billion, attributable to higher shipment volumes and improved price realization, partially offset by a negative currency translation. Construction & Forestry experienced a 7% year-over-year decline in sales to $1.3 billion, due to lower shipment volumes.
Deere expects equipment sales to grow around 4% in the second quarter of fiscal 2013 and 6% for the full year. Segment wise, Deere expects worldwide sales of Agriculture and Turf equipment to grow 6% in fiscal 2013.
Higher commodity prices and strong farm incomes are expected to boost demand for farm machinery during the year. Furthermore, Deere’s sales are expected to benefit from global expansion and lines of advanced new equipment. Both the non-residential and residential construction sectors are showing signs of a much awaited recovery. This, in addition to the new highway bill, will improve demand for construction equipment in the U.S. market.
On the flipside, Deere’s agriculture and turf sales in Europe will continue to remain affected due to weakness in the overall economy and poor harvest in the U.K last year. In the forestry sector, further weakness in the European markets is expected to offset higher demand in the U.S.
Effective Feb through Jul 2013, an additional 27.5% import duty has been placed on all imported combines going to Russia, Kazakhstan, and Belarus, thus bringing the import duty to 32.5%. This is expected to have an adverse impact on sales of imported combines in these countries.
Furthermore, Deere expects lower manufactured volume in the second quarter compared with last year. Higher production costs associated with interim Tier 4 as well as global growth expenses will negatively impact margins in the quarter. We maintain our long-term Neutral recommendation on the stock.
Deere currently retains a Zacks Rank #2 (Buy). Other stocks in the same industry are Alamo Group, Inc. (ALG), Kubota Corporation (KUB), and Toro Co. (TTC) which carry a short-term Zacks Rank #2 (Buy).
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