November 20, 2013 / 12:40 PM / 4 years ago

UPDATE 5-Deere offers upbeat forecast on construction rebound

* Lower commodity prices to weigh on tractor sales

* Construction equipment sales expected to rise 10 pct

* Analyst calls Q4 “big quarter” (Adds comment from conference call comments, updates shares)

By James B. Kelleher and Sagarika Jaisinghani

Nov 20 (Reuters) - Deere & Co offered an surprisingly upbeat earnings forecast for 2014 on Wednesday, saying sales of construction and forestry equipment in the coming year should offset an anticipated slowdown in demand for agricultural machinery.

Shares in the world’s largest maker of tractors and harvesters rose 2.6 percent in afternoon trading on the New York Stock Exchange after the company issued the outlook and reported higher-than-expected fourth-quarter results.

The past five years have been great for farmers and for companies like Deere that supply their equipment. Agricultural commodity prices have been pulled sharply higher by rising demand for food in fast-growing emerging markets, an increased appetite for ethanol and biofuels in many other places, and weather-related harvest issues.

But with corn futures prices near a three-year low, pulled down by forecasts of a huge U.S. harvest and a proposal to slash U.S. biofuel rules, farm profits are expected to fall next year.

On Wednesday, Deere provided a first glimpse of just how much it expects its business to suffer as a result of softer commodity prices, and it was not nearly as bad as many analysts had feared.

Deere acknowledged worldwide sales of agriculture and turf equipment would fall about 6 percent in 2014 as farmers in almost all of its key markets, including the United States, Canada, Europe, and South America, adjust to the new environment.

But the heavy machinery maker’s other businesses are expected do well as the housing recovery gains traction, it said. While Deere is best known for its tractors and harvesters, it also makes bulldozers, dump trucks and other vehicles used by builders.

“We are beginning to see some positive indicators,” Marie Ziegler, Deere’s deputy financial officer, said during a conference call.

“Home sales and prices are improving and residential construction is growing. Some markets are seeing building lot shortages, and architects and builders are reporting more activity.”

That strength comes at a good time for Deere. The Moline, Ill-based expects that corn planted next spring in the United States will fetch just $4.50 a bushel by the time it is harvested in the autumn, a 35 percent decline from the price last fall but about 10 cents a bushel higher than the current price.

Soybeans, meanwhile, will fetch $11 a bushel next fall, Deere said, down from $12.50 this year and $14.40 last year. Wheat will go for $6.75 a bushel next fall, the company forecast, down from $7 this year and $7.77 last year.

As a result, Deere now expects total U.S. farm cash receipts to come in at $377.7 billion in 2014, off about 4 percent from 2013 and down 7 percent from last year.

Yet despite the headwinds, Deere now expects to post a fiscal 2014 profit of about $3.3 billion. Wall Street estimated $3.04 billion, according to Thomson Reuters I/B/E/S.

The company’s better-than-expected outlook for 2014 is driven by what it says will be a welcome rebound in demand for its construction and forestry equipment as the housing market continues to recover. Housing had languished while agriculture had boomed in recent years.

Deere expects worldwide sales of construction and forestry equipment to increase by about 10 percent in 2014.

“The most notable news is the outlook that is above Street expectations, with ag equipment sales expected to hold up reasonably well relative to a stellar year in 2013, and construction equipment sales expected to see a timely ramp-up to serve as an offset,” Edward Jones analyst Matt Arnold said.

In the latest quarter, Deere reported net profit of $806.8 million, or $2.11 per share, up from $687.6 million, or $1.75 per share, last year.

Revenue fell 3 percent to $9.451 billion.

Analysts, on average, expected the Moline, Illinois-based company to report a profit of $1.89 a share on revenue of $8.68 billion, according to Thomson Reuters I/B/E/S.

“It’s a big quarter,” said Eli Lustgarten, an analyst with Longbow Research.

“Volumes were better than expected and profitability was a lot better. And it’s actually even stronger than it looks because the company took a writedown on its landscape business that - back of the envelope - probably shaved 17 cents a share off (earnings per share).”

Deere’s stock was up $2.16 at $84.97 on the NYSE. (Reporting by James Kelleher in Chicago and Sagarika Jaisinghani in Bangalore; Editing by Jeffrey Benkoe)

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