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Agricultural, forestry and construction equipment manufacturer Deere & Company announced mixed retail sales for August. Sales in row crop tractors and combines outperformed the industry, while sales for utility tractors and four-wheel drive failed to match the industry performance. Deere’s reported inventory levels were lower than the industry for all its product segments.

August Retail Sales Performance in Detail

In the agriculture and turf segment, Deere’s U.S. and Canada utility tractor sales growth went up by double digits in August, but remained lower than the industry-wide sales growth of 12%. Deere’s inventory was reported to be lower than the industry-wide inventory of utility tractors, which stood at 47% of the previous 12 months sales.

Sales of row crop tractor outperformed the industry growth rate of 16% during the month. The industry inventory of row crop tractors were 34% 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 decreased in double digits in July, in stark contrast to the 1% growth witnessed across the industry during the month. Deere’s inventory for the four-wheel drive tractor was lower than the industry inventory at 25% of the previous 12 months sales.

Combine sales dipped in single digits, but fared better when compared to the 16% decline across the industry. Deere’s inventory for the combines was lower than the industry inventory at 22% of the previous 12 months sales.

Retail sales of selected turf and utility equipment were up in double digits. In Europe, retail sales of tractors were up in single digit, while combine sales were flat year over year. Coming to the Construction and forestry segment, sales went down in single digits on a “First in Dirt” basis (retail sale of a new unit plus first use of a new rental unit). However, on a settlement basis (retail sale of a new unit plus conversion of rental unit to a retail sale), sales were up in single digits.

Deere’s Q3 Sales Performance and Expectations

Deere’s worldwide total sales increased 4% year over year to $10 billion, beating the Zacks Consensus Estimate of $9.3 billion. Agriculture and Turf equipment sales increased 8%, but were offset by an 11% dip in Construction & Forestry.

Deere expects equipment sales to decrease around 5% year over year for the fourth quarter of fiscal 2013. Agriculture and Turf equipment sales is expected to grow 7% in fiscal 2013 aided by higher commodity prices, strong farm incomes, global expansion and new lines of advanced equipment.

Region-wise, Deere expects industry farm machinery sales in the U.S. and Canada to increase 5% year over year in 2013. In Europe, sales are projected to be down 5% due to continued deterioration in the overall economy and poor harvest in the U.K. last year.

However, global sales for Construction & Forestry equipment may fall about 8%, reflecting a cautious outlook for the U.S. economic growth. Global forestry sales are expected to be higher as improved U.S. demand more than offset weakness in European markets.

Peer Performance

Deere’s performance was better than that of Caterpillar Inc. . According to the last published data, sales growth for the construction and mining equipment continued to be in the red with a decline of 9% in July, the eight consecutive month of decline.

Our Take

The U.S. Department of Agriculture is forecasting a record net farm income of $120.6 billion in 2013. Increased farm incomes have compelled farmers to continually upgrade and expand their fleet; thus leading to increased revenue prospects for Deere. Deere will benefit from recovery in construction sector and strength in Brazil.

However, weakness in European markets, soft conditions in the U.K. farm sector, rising competition, weaker US outlook and government spending, additional import duty on all combines going to Russia, Kazakhstan, and Belarus and higher production costs and research and development costs associated with interim Tier 4 remain concerns.

Deere currently retains a Zacks Rank #3 (Hold). Other stocks in the same industry that are worth a look include Alamo Group, Inc. and Kubota Corp. , which retain a Zacks Rank #1 (Strong Buy).

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