Shares of Deere (DE) were underperforming in Wednesday's trading session. Shares of the manufacturer of agricultural, construction and forestry equipment fell over 6% after releasing a disappointing third quarter earnings report.
Third Quarter Results
Deere reported third quarter revenues of $9.59 billion, up 15% on the year. Reported revenues missed the consensus estimate by $20 million. Solid volume growth and a 5% raise in prices, was partially undone by a 5% currency headwind as a result of dollar strength.
The company reported net income of $788.0 million, compared to $712.3 million last year. Earnings per share rose from $1.69 to $1.98. On average, analysts were looking for Deere to report quarterly earnings of $2.31 per share.
The results came as quite a disappointment to investors and analysts. An early harvest boosted demand for Deere's products. The production of new, more complex equipment, resulted in unexpected hiccups in the manufacturing process. The company experienced up to 14 days in delays of its production schedules. This resulted in fewer deliveries and third quarter sales. Deere expects to make up a portion of the shortfall in the fourth quarter.
Chairman and CEO Samuel Allen commented on the results,
John Deere delivered record third quarter performance in both sales and income. Although a strong quarter, we are not satisfied that sales fell short of our expectations due to weakening in certain international markets and short-term manufacturing inefficiencies resulting from the introduction of a record number of new products.
Agricultural & Turf
Third quarter revenues at Deere's largest division rose 14% to $7.3 billion. Operating profit rose 18% to $1.01 billion. Results were driven by volume increases and price realizations, which offset increasing raw material costs and adverse currency movements.
Construction & Forestry
Revenues at the construction and forestry division rose 23% to $1.7 billion. Operating profits rose a mere 3% to $113 million. Strong shipment volumes and price realizations drove revenue growth. Margins were impacted by higher production costs, raw material costs and a rise in general costs.
Deere guides for fourth quarter- and full year sales to increase 13% compared to last year. A strong dollar is resulting in a 3% headwind for full year revenues, and 4% for the fourth quarter. Deere now anticipates full year net income of $3.1 billion. This comes as a major disappointment as the company previously guided for annual profits of $3.35 billion. Analysts already anticipated earnings of $3.4 billion.
Agricultural sales remain strong in North America and the Northern parts of Europe, offset by weakness in Argentina due to fewer import licenses being granted. Furthermore, sales are softening in India, China and Southern Europe.
CEO Allen continued,
Global growth and dryness in key markets is warranting some cautiousness. However, this year's drought could positively influence our outlook as it spotlights the need for John Deere's highly productive agricultural equipment.
Deere ended its third quarter with $4.9 billion in cash, equivalents and marketable securities. The firm operates with $31.2 billion in short- and long-term debt, for a net debt position of $26.3 billion. For the first nine months of the year, Deere reported revenues of $24.5 billion. The company net earned $2.4 billion, of $5.88 per diluted share.
After Wednesday's 6% slump, the market values Deere at $30 billion. This values the company at 0.9 times annual revenues and 10 times earnings. This compares to a revenue multiple of 0.9 times for Caterpillar (CAT), which trades at 9 times trailing annual earnings.
Currently, Deere pays a quarterly dividend of $0.45 per share, for an annual dividend yield of 2.5%.
Wednesday's dismal trading pushed shares of Deere into the negative territory for 2012. Shares are down roughly 3% since the start of the year. Shares quickly rallied to peak at $89 in February, but quickly fell to trade within a $70-$85 trading range.
Long-term shareholders are not worried about the subdued short-term performance. Excluding dividends, shares returned over 250% over the past decade, as the growing earth's population has boosted demand for agricultural equipment. Furthermore, rising commodity prices allowed farmers to upgrade their equipment.
Deere's third quarter results were quite weak. Besides lower demand in South America, China and India, the company also dealt with an early harvest and production issues. The company stresses that it will make up by a stronger fourth quarter, and remains confident for the long-term.
Despite the long-term prospects, I remain on the sidelines. While the shares are not expensive, and the long-term growth prospects remain good, the business model remains rather capital intensive. The company takes on a lot of leverage by financing expensive agricultural equipment to farmers which might otherwise not be eligible for financing.
While the performance of the loan book is excellent, it remains a long-term concern for me.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.