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Deere's (DE) Q1 Earnings, Revenues Beat Estimates

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Deere & Company’s (DE - Free Report) first-quarter fiscal 2017 (ended Jan 29, 2017) earnings declined 23.8% year over year to 61 cents per share. However, earnings beat the Zacks Consensus Estimate of 50 cents by a wide margin of 22%.

Operational Update

Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) came in at $4.698 billion, down 1% year over year. Revenues surpassed the Zacks Consensus Estimate of $4.656 billion.

Price realization had an impact of 2% in the quarter and favorable currency-translation impact was 1%. Region wise, equipment net sales decreased 8% in the U.S. and Canada, but increased 11% in the rest of the world. Total net sales (including financial services and others) were $5.625 billion, up 2% year over year.

Deere & Company Price, Consensus and EPS Surprise


Deere & Company Price, Consensus and EPS Surprise | Deere & Company Quote

Cost of sales in the quarter edged down 1.1% year over year to $3.8 billion. Gross profit in the quarter came in at $901 million, down 3% year over year. Selling, administrative and general expenses climbed 11% to $659 million. Operating profit improved 2% year over year to $416 million.

Operating income from equipment operations jumped 14% year over year to $247 million driven by price realization, partially offset by expenses associated with the previously announced voluntary employee-separation program, higher warranty costs and the unfavorable effects of foreign-currency exchange.

Segment Performance

Agriculture & Turf segment’s sales remained flat year over year to $3.6 billion. Lower shipment volumes and higher warranty costs were offset by price realization, and the favorable impact of currency translation. However, operating profit at the segment surged 48% year over year to $213 million aided by a gain on the sale of a partial interest in SiteOne Landscape Supply, Inc. and price realization. These were negated by voluntary employee-separation expenses, higher warranty costs and the unfavorable effects of foreign-currency exchange.

Construction & Forestry sales dipped 6% year over year to $1.1 billion, hurt by lower shipment volumes and higher sales-incentive costs. The segment reported operating profit of $34 million compared with $70 million in the prior-year quarter. The significant decline was mainly due to higher sales-incentive expenses and the voluntary separation program.

Net revenue at Deere’s Financial Services division totaled $696 million in the reported quarter, up 9% year over year. The segment’s operating profit came in at $169 million compared with $194 million in the year-ago quarter. Net income at the segment was $114.4 million as against $129.4 million recorded in the year-earlier quarter. This decline was stemmed by less favorable financing spreads and voluntary separation expenses.

Financial Update

Deere reported cash and cash equivalents of $3.89 billion at the end of first-quarter fiscal 2017 as against $3.46 billion in the comparable period last year. The company reported cash used in operations of $742 million at the end of first quarter compared with $777.6 million in the prior-year period. At the quarter end, long-term borrowing totaled $22.9 billion, down from $24.5 billion in the year-ago period.

Looking Ahead

Deere projects total equipment sales to increase about 4% year over year in fiscal 2017 and rise about 1% in second-quarter fiscal 2017 compared with year-ago period. Foreign-currency rates are not likely to have a material translation effect on equipment sales for the year or the second quarter. For fiscal 2017, Deere anticipates net sales to be up 4% year over year and projects net income at $1.5 billion.

Segment wise, Deere estimates Agriculture and Turf equipment sales to increase about 3% in fiscal 2017, with currency translation not expected to have a material impact. Industry sales for agricultural equipment in the U.S. and Canada are likely to be down 5−10% in fiscal 2017 owing to weakness in the livestock sector and the lingering impact of low crop prices. This is also expected to affect both large and small equipment.

In the EU28 region, sales will be down 5% due to low commodity prices and farm income. In South America, industry sales of tractors and combines are likely to jump 15–20% on the back of improving economic and political conditions in Brazil and Argentina. Sales in Asia are projected to remain flat to up slightly, triggered by higher sales in India. Deere expects sales growth of turf and utility equipment in the U.S. and Canada to remain around flat for 2017.

The company foresees global sales for Construction & Forestry equipment to be up about 7%, with no material currency-translation impact. The outlook for net income from Financial Services has been set at $480 million for fiscal 2017. Lower losses on lease residual values will be partially offset by less-favorable financing spreads and an increased provision for credit losses.

Share Price Performance

In the last one year, Deere has underperformed the Zacks classified Machinery-Farm sub-industry with respect to price performance. The stock gained 35.8%, while the industry rose 36% over the same time frame.

Zacks Rank

Currently, Deere carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space include II-VI Incorporated (IIVI - Free Report) , Kennametal Inc. (KMT - Free Report) and Apogee Enterprises, Inc. (APOG - Free Report) . All three of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

II-VI Incorporated has a remarkable positive average earnings surprise of 59.23% for the last four quarters. Kennametal generated a positive average earnings surprise of 9.90% over the trailing four quarters. Apogee Enterprises has delivered an average positive earnings surprise of 13.24% in the past four quarters.

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