Deere & Co’s Third-Quarter Orders Supportive as Company Well-Positioned in Ag, Construction

Deere & Co’s (DE) third-quarter orders are supportive of RBC Capital Markets view that the company is well positioned to see gains from improved markets for global farm equipment and the strong construction industry, the bank said in a note to clients.

The company said Friday that third-quarter earnings missed expectations due to higher costs for raw materials, but net sales topped forecasts. Earnings came in at $2.59 a share, missing consensus compiled by Capittal IQ for $2.75 a share.

Sales, however, rose 36% to $9.3 billion, beating forecasts for $9.2 billion. The cost of goods sold, however, rose to $7.15 billion from $5.25 billion a year earlier, Deere said.

Chief Executive Samuel Allen said in a statement that farm equipment sales in North America and Europe saw “solid gains,” offsetting some increase cost pressures for raw materials and freight. The company is addressing the increased costs through a combination of cost management and pricing actions, he said.

Equipment sales are pegged to rise by about 30% in fiscal 2018 and 21% in the fourth quarter. Adjusted net income is seen at $3.1 billion for the full year, the company said.

“(The) disclosure that equipment orders are tracking up year-over-year helped quell fears related to potential for trade/tariff policy to disrupt the nascent North America farm equipment replacement cycle, and offset light third-quarter earnings per-share versus construction,” RBC analyst said. “An uptick in share repo activity ($393 million) is also positive, in our view.”

The analysts, who maintained their outperform rating and $200 price target, said they like Deere’s position in the farm-equipment cycle, which is still in the early starges of recovery. The bank expects better costs and fewer operating hiccups to support large incrementals next year. Construction also seems poised for upside momentum, the bank said.

Orders for planters and sprayers were up year-over-year with better pricing, and tractor orders were also higher, RBC analysts noted. Rising take rates for precision agriculture applications are favorable for margins. Deere’s construction orders continue to extend due to broad demand, which supports better-than-normal visibility, the bank said.