Shares of Deere (DE) were a laggard in Wednesday's trading session. The manufacturer of agricultural, construction and forestry equipment reported its fourth quarter earnings before the market open.
Fourth Quarter Results
Deere reported fourth quarter revenues of $9.79 billion, up 14% on the year. Total net sales of equipment rose 14% to $9.05 billion, above the analysts consensus of $8.82 billion.
The world's largest seller of farm machinery reported a quarterly net income of $687.6 million, up 2.7% on the year. As a result of share repurchases, earning per share rose by 8.0% to $1.75 per diluted share.
Earnings fell short of analysts expectations of $1.88 per diluted share. Deere's fourth quarter profit was impacted by a $33.4 million write-down in Deere's crop irrigation business. Excluding the write down, earnings came still short of analysts forecasts.
CEO and Chairman Samuel R. Allen commented on the results, "In the face of continuing global economic pressure, John Deere has completed another record year. Our success reflects positive customer response to our lines of innovative equipment coupled with extensive efforts to expand our global competitive position."
Agriculture & Turf
The agricultural division reported a solid 16% increase in its fourth quarter revenues, coming in at $7.4 billion. Higher shipment volumes and prices were only partially offset by the negative consequences of a strong dollar.
Operating income rose 7% to $931 million on higher production costs, goodwill impairment charges and higher raw material costs. Operating margins fell 110 basis points to 12.6% on higher investments and an increase in overhead.
High commodity prices and strong farming income will support an expected 4% sales increase in revenues in 2013. North American agricultural sales are expected to be flat on strong sales of horsepower tractors which is offset by weakness in livestock and diaries.
Construction & Forestry
Revenues for the construction and forestry division rose 7% for the fourth quarter, totaling $1.7 billion. Operating income rose 38% to $120 million on strong pricing and volumes. Operating margins rose 170 basis points to 7.3%.
Sales of construction and forestry equipment are expected to increase by 8% in the coming year on the modest economic improvements in the US.
Deere expects that equipment sales are to increase by 5% for the full year of its fiscal 2013. First quarter revenues are expected to rise 10% on the year. The guidance implies full year revenue to increase to $35.2 billion, above analysts forecasts of $34.6 billion.
Deere guides for full year earnings of $3.2 billion falling short of analysts forecasts of $3.3 billion.
Weakness in Europe will be offset by strength in South America. Asian revenues are under pressure on soft conditions in India and China.
CEO Allen commented on the outlook for Deere, "We are proud of the company's performance in 2012 and look forward to building on these gains in 2013 and beyond. Despite fragile economic conditions in many regions, we have great confidence in the company's prospects and in our ability to deliver value to investors and other stakeholders in the future."
Deere ended its fourth quarter with $6.1 billion in cash, equivalents and short term investments. The company operates with $32.4 billion in short and long term debt, for a net debt position of $26.3 billion.
For the full year of its fiscal 2012, Deere generated revenues of $36.2 billion. The company net earned $3.1 billion, or $7.63 per diluted share.
Factoring in Wednesday's decline, the market values Deere at $32.4 billion. This values the firm at 0.9 times annual revenues and almost 11 times annual earnings.
Deere currently pays a quarterly dividend of $0.46 per share, for an annual dividend yield of 2.2%.
Year to date, shares of Deere have risen some 7%. Shares quickly advanced from $77 in January to highs of $89 in February. Shares fell back to $70 in June on the back of global economic worries. Shares recovered from that point in time, currently exchanging hands at $83 per share.
Shares of Deere traded around $90 in 2008, before the economic crisis send global equity markets. Shares fell to lows of $25 in the beginning of 2009 but advanced to set all time highs around $100 in the beginning of 2011. Between its fiscal 2008 and 2012, Deere reported a 40% increase in annual revenues to $36.2 billion. Net income rose from $2.1 billion in 2008 to $3.1 billion this year.
Deere's problem is the poor short term earnings growth, despite strength in global agricultural markets and strong revenue growth. Higher investments in future growth and higher input prices put a pressure on margins despite favorable market conditions. The long term prospects remain undoubtedly good, a reason why Berkshire Hathaway picked up 3.98 million shares, according to its latest filing. Deere remains the global leader in agricultural equipment and an increase in global food production which requires a more productive agricultural industry will favor Deere.
While I appreciate Deere's long term prospects, I remain on the sidelines. Shares are appealing based on valuation multiples but I am concerned about the capital intensity of the business and the sizable long term debt position.