Deere posts higher-than-expected profit, trims forecast

Reuters — Deere and Co. on Wednesday reported a stronger-than-expected quarterly profit but trimmed its outlook for full-year sales of farm equipment, citing deteriorating conditions in South America and the former Soviet Union.

Sales of the company’s green-and-yellow tractors and harvesters fell a worse-than-expected 12 per cent during the second quarter ended on April 30, Deere said, but cost cuts, a lower-than-expected tax rate and improved margins in its construction equipment unit helped offset that weakness.

Deere also stuck by its full-year profit forecast despite growing weakness in Argentina, where it said import tariffs were hurting tractor sales, and Brazil, where contracting margins in the sugar cane industry were discouraging capital investment.

In the Commonwealth of Independent States, Deere said geopolitical tensions between Russia and Ukraine were disrupting farm credit in the region, putting the 2014 crop at risk.

The company said sales in Kazakhstan, Belarus and Russia were also hurt by import policies. It did not elaborate.

Sales in the region will fall “significantly” this year, Deere said. It had previously said they would be “down slightly.”

The company, the world’s largest maker of farm equipment, had already signaled that demand for its products would fall in most markets this year following a bumper crop that sent commodity prices down.

Lower commodity prices hurt Deere and its rivals because they shrink farm incomes and discourage investment in new equipment.

On Wednesday, Deere said the weakness would be greater than it expected, with sales of agricultural equipment down about seven per cent in fiscal 2014. Three months ago, it said it expected a decline of about six per cent.

“The execution was terrific during the quarter, but the signs of a cyclical peak are growing,” said Longbow Research analyst Eli Lustgarten.

Some investors hoped a rebound in construction demand, particularly in the United States, would help offset that softness for Deere, which also makes equipment for builders.

But Deere also scaled back its outlook for that industry on Wednesday. Although it held to the forecast for its own construction sales, it cut its expectation for total U.S. construction investment growth to a 4.3 per cent annual rate for 2014 from 6.3 per cent.

The company also reduced its forecast for 2014 U.S. housing starts by nearly 10 per cent to 1.05 million.

Deere posted a second-quarter profit of US$980.7 million, or $2.65 a share, down from $1.08 billion, or $2.76 a share, a year earlier. Analysts on average had expected $2.48 a share, according to Thomson Reuters I/B/E/S.

Revenue fell nine per cent to $9.95 billion.

— James B. Kelleher is a Reuters correspondent based in Chicago.

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