CHICAGO (Reuters) - Deere & Co (DE.N) posted higher-than-expected earnings, sending its shares up more than 6 percent, as wider margins at its farm equipment and finance units helped it to overcome weak economic conditions.
The company on Wednesday also raised its outlook for fiscal 2010 machinery sales growth to a range of 6 percent to 8 percent, from a previous estimate that sales would fall 1 percent.
The results provided an early impressive report card on the company’s new chief executive, 55-year-old Sam Allen, a life-long Deere employee who took over the helm last summer after heading up the company’s construction and forestry division for four years.
Profitability in the unit that makes Deere’s green tractors and harvesters was especially impressive, reporting margins of nearly 10 percent — three times what investors had expected, according to Eli Lustgarten, an analyst at Longbow Securities.
“It looks like brilliant profitability in ag in a relatively weak market,” Lustgarten said. “It’s a combination of restructuring, it’s a combination of operating efficiency, it’s execution, and brilliant ag margins.”
U.S. manufacturers have laid off some 2.2 million workers since the recession officially began in December 2007 — more than a quarter of the 8.4 million workers idled in the downturn.
Those payrolls cuts, combined with the continued streamlining of their production lines and other structural cost reductions, have turned the sector into what one analyst recently called an “operating leverage beast,” capable of turning modest increases in demand into big jumps in profitability.
In Deere’s case, the company also credited lower raw material costs for its better-than-expected performance.
Deere, the world’s largest maker of agricultural equipment, reported a fiscal first-quarter net profit of $243.2 million, or 57 cents a share, up from $203.9 million, or 48 cents a share, a year earlier.
Revenue fell 6 percent to $4.84 billion.
Analysts, on average, expected the Moline, Illinois-based Deere to earn 19 cents a share on sales of $4.12 billion, according to Thomson Reuters I/B/E/S.
Net income at the company’s financial services arm nearly doubled to $85.1 million, from $46.8 million last year, as the spread between Deere’s borrowing costs and the interest it charges customers widened.
Deere said commodity prices — and farm income — would remain healthy in 2010, supporting industry sales of farm equipment in the United States and Canada at levels comparable to those seen in 2009, but lifting sales in South America as much as 15 percent.
“The strength we’ve seen in our order books is driving this increase,” the company said. Demand for large tractors has been greater than expected. It said farmers wanting its new 8R series row-crop tractor were on a waiting list that went out to September.
It warned, however, that industry sales in Europe, especially Central Europe and the former Soviet Union would “remain under pressure as a result of challenging economic conditions and low levels of available credit.”
Deere, which also makes construction and forestry equipment, said it expected that business to remain “deeply depressed for the year as a result of a decline in non-residential construction and relatively high used-equipment levels.”
Deere shares rose $3.54, or 6.6 percent, to $57.32 on the New York Stock Exchange after earlier rising as high as $58.05.
Reporting by James B. Kelleher; Editing by John Wallace and Maureen Bavdek