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Deere Cuts Profit Forecast After Farm Economy Deteriorates

Feb. 19, 2016
The company now sees equipment sales falling about 10%, compared with an earlier prediction they would drop about 7%. 

Deere & Co. (IW 500/37), the world’s largest agricultural equipment maker, cut its fiscal full-year profit and sales forecasts amid a weaker outlook for farmers as they face lower commodity prices and declining incomes.

Net income in the 12 months through October will be about $1.3 billion, Deere said on February 19, down from a November projection of about $1.4 billion.

The Moline, Illinois-based company now sees equipment sales falling about 10%, compared with an earlier prediction they would drop about 7%. The shares fell the most in five months.

Like American farmers, Deere faces a third straight year of falling profit. Farm income is suffering as an oversupply of crops and meat depresses prices for agricultural commodities and farmland. Nebraska’s Creighton University said Thursday that about 37% of Midwest and Great Plains bank chiefs who participated in a survey saw their local economy in recession.

“The need to repair balance sheets and reduce inventories may defer equipment demand into 2017," Bloomberg Intelligence analysts Karen Ubelhart and Anoori Kadakia said in a report on February 18.

Smaller Workforce

Deere has navigated the downturn by laying off employees at several plants. Its full-time workforce fell to 57,200 at the end of October from 59,600 a year earlier. The company posted better-than-expected quarterly earnings Friday, the 13th time in a row it’s beaten analysts’ estimates. Net income fell to 80 cents a share in the three months through January from $1.12 a year earlier. That compares with the 71-cent average of 19 estimates compiled by Bloomberg.

“Although Deere expects another challenging year in 2016, our forecast represents a level of performance much better than we have experienced in previous downturns,” Samuel R. Allen, the company’s chairman and chief executive officer, said in the statement.

Deere forecasts global sales of agriculture and turf equipment will drop about 10 percent in fiscal 2016, citing negative currency translation. It sees industrywide agricultural machinery sales in the U.S. and Canada slumping as much as 20% due to low commodity prices and stagnant farm incomes.

For the fiscal second quarter, the company’s total equipment sales will be down about 8% from the same period a year earlier, it said.

Incremental Cuts

Given the extent of the commodity slump, Deere’s downward revisions aren’t as bad as some investors might have expected, Stephen Volkmann, an analyst at Jefferies & Co. in New York, said by phone.

“This is a little bit of death by paper cuts,” said Volkmann, who recommends holding Deere shares. “It’s small incremental cuts. They’re doing a good job managing what they can.”

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