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By Bob Tita
Deere & Co. trimmed its revenue and earnings forecast for 2016 as the world's largest supplier of farming machinery continues to trudge through the worst drought in U.S. demand in 15 years.
After a strong run that began last decade for farm equipment and was aided by U.S. tax breaks for equipment, farmers have scaled back their purchases amid lower prices for corn, soybeans and other commodities. Deere's overseas sales also have been hurt by the strong dollar and by economic and political turmoil in Brazil, which had been a strong market for
Deere.
Moline, Ill.-based Deere predicted its equipment sales will fall a steeper 10% this year to more than $23 billion after previously forecasting a 7% decline. The weaker sales outlook followed fiscal first-quarter equipment sales that fell 15% from a year earlier to $4.8 billion. Analysts were looking for $4.9 billion in sales after the company forecast an 11% decline in November.
The company also shaved its net income outlook for the year to $1.3 billion from $1.4 billion previously. The revision implies per-share earnings of about $4.10, according to analysts, who on average had expected the company to earn $4.24 this year.
Deere's stock was recently trading down 4% at $77.02 a share.
Deere is trying to break its profit fall this year with margin-boosting strategies that include cutting equipment inventories and overhead costs, rising prices on equipment and increasing sales of replacement parts and services. Deere acknowledged Friday that executing the plan is becoming more difficult in the face of steep drops in farm and construction equipment. Even with an 11% reduction in first-quarter overhead, Deere's operating profit margin contracted to 7.4% in the quarter ended Jan. 31 from 10.1% a year earlier.
"Our ability to pull costs out relative to any further sales declines will be more challenging," said Tony Huegel, director of investor relations, during a call with analysts on Friday.
Its fiscal first-quarter farm machinery revenue declined 12% from a year earlier to $3.6 billion as operating income from the farm business plunged 46% to $144 million. Deere widened its forecast decline in farm equipment sales for 2016 to a 10% from an 8% decline previously.
The company left its industrywide outlook for retail sales of farm machinery in the U.S. and Canada unchanged at down between 15% and 20% compared with 2015.
Deere's construction and forestry equipment sales during the quarter fell 23% compared with the same period last year to $1.2 billion. Profit from the construction unit plunged 52% to $70 million. Deere now expects construction sales to drop 11% this year from 2015, more than double the decline it had predicted.
"Construction was worse than expected," said Lawrence De Maria, an analyst for William Blair & Co. "We give Deere credit for operating well in a challenging time, but there is little reason for optimism in the next couple of years."
Deere reported a quarterly profit of $254.4 million, or 80 cents a share, down 34% from $386.8 million, or $1.12 a share, a year earlier. Per-share results were helped by lower taxes. Total revenue, including from Deere's finance business, fell 13% to $5.53 billion.
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