Deere & Company Earnings Preview: Q1 Boosted by U.S. Farm Income

Deere & Co., the world's largest maker of farm tractors and combines, is expected to report strong fiscal first quarter results before markets open Wednesday, as U.S. farmers flush with cash update aging fleets and Deere's products gain greater acceptance in Brazil.

Deere (NYSE:DE) is likely to report earnings per share of $1.23 on revenue of $6.49 billion, based on the average estimate of analysts surveyed by Thomson Reuters. In the year earlier period, Deere earned $1.20 per share on $5.51 billion in revenue.

For the fiscal year, analysts expect Deere will earn $7.74 per share on revenue of $33.47 billion.

I think they are going to have a very solid first quarter driven by demand in North America, said Lawrence DeMaria, an analyst with William Blair.

Deere expects to record five percent to 10 percent agricultural equipment growth in North America in fiscal 2012. Net income attributable to Deere is projected at about $3.2 billion in 2012, breaking the $3 billion mark for the first time in Moline., Ill., company's history.

Deere surprised many investors with its positive fiscal 2012 outlook, DeMaria wrote in a Dec. 13 research note. Deere is typically conservative with guidance.

Susan Karlix, manager of investor relations at Deere told analysts during a Nov. 23 conference call the company expects sound farmer confidence and strong equipment demand in fiscal 2012.

Robust Farm Business

Deere holds a nearly 50 percent share of the North American farm equipment market, a market that has been incredibly strong the past few years as farmers have used high commodity prices and income to replace their fleets at much high rates.

Farmers have significant capital to invest in machinery to replace their fleets, which is what they continue to do on a more accelerated basis than they have in the past, especially in North America, DeMaria said. Some professional farmers have actually become accustomed to replacing every one to three years, from three to five.

According to Deere, U.S. farming is approaching a peak level and commodities prices are expected to hold at elevated levels creating less volatility in demand.

U.S. cash receipts, a predictor of machinery demand, are at an all time high. And farmer balance sheets and debt levels are also in excellent shape and credit quality is stellar.

Crop prices, some of which reached the highest averages ever in 2011, sent net farm income up 28 percent to $100.9 billion, the U.S. Department of Agriculture estimates. That's the highest value recorded since 1974.

Crop receipts are expected to rise more than 16 percent in 2011, led by sales of corn, soybeans and wheat. Livestock receipts are expected to increase by 17 percent, with the receipt forecasts for cattle, dairy and hogs reaching nominal highs.

Although we expect crop prices to be somewhat below the record levels of the past year, we still think they will remain high enough to drive major levels of farm cash receipts and ongoing strong demand for farm equipment, Standard & Poor's equity analyst Michael Jaffe wrote in a Jan. 28 note.

Brazil Plants

Deere's dealer locations in Brazil roughly doubled since 2007 and the company picked up four percentage points of tractor market share in fiscal 2011.

They picked up a lot of shares in South America recently from market leader Agco, said Adam Fleck, a Morningstar Inc. analyst.

Brazilian dealers are viewed as No. 2 in strength, just behind the U.S. dealers.

Deere's success in Brazil in terms of gaining market share is its broadened product line, which includes 21 products versus four historically. Deere can gain share without sacrificing margins, Credit Suisse analyst Jamie Cook, wrote in a Jan. 24 research note.

They are doing very, very well in Brazil and their production capacity is fully up and running for a broader array of products, DeMaria said. For the first time, they are actually attacking the whole market instead of certain niches within the market.

Deere will also open up two factories in Brazil in 2013 to manufacture construction equipment.

Stock Performance

Deere's stock -- like shares of Deere rivals CNH Global NV (NYSE:CNH) and AGCO Corp. (NYSE:AGCO) -- has enjoyed a double-digit increase in 2012.

Year to date, shares of CNH Global NV (NYSE:CNH) have traded 21 percent higher, while shares of AGCO Corp. (NYSE:AGCO) have gained 22 percent.

Shares of Deere closed up $1.13 today to $88.68, a 1.13 percent gain. Deere's other competitors include Caterpillar Inc. (NYSE:CAT), Astec Industries Inc. (NYSE:ASTE), Arts-Way Manufacturing Co. Inc. (NASDAQ:ARTW) and Lindsay Corp. (NYSE:LNN).