Deere aims for bigger profit as price hikes power earnings beat

John Deere tractors are seen for sale at a dealer in Longmont, Colorado, U.S., February 21, 2017. REUTERS/Rick Wilking/File Photo

Feb 18 (Reuters) - Deere & Co (DE.N) raised its annual profit forecast after posting estimate-beating quarterly earnings on Friday, as the world's largest farm equipment maker expects a margin boost from price hikes and solid demand for its tractors and combines.

Demand for agricultural equipment is seen to be high this year as farmers are flush with cash from high grain prices and government support during the COVID-19 pandemic. They, however, face challenges from soaring costs for seeds and fertilizers.

The U.S. Department of Agriculture estimated net farm income to have risen 25% in 2021 but has warned it may fall 4.5% this year.

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Deere has raised equipment prices to combat rising shipping and supply-chain costs, but that has not deterred demand, with the company's North American order books full or nearly full for most of its large farm equipment and crop care products in 2022.

"Looking ahead, we expect demand for farm and construction equipment to continue benefiting from strong fundamentals," Chief Executive John May said in a statement.

Until supply and demand starts to stabilize, the farm equipment giant will stay the course with price increases of roughly 8% to offset the rising costs of materials, which will help drive margin expansion for the year.

Production problems due to supply snarls linger, but Third Bridge senior analyst Patrick Donnelly said he remained bullish on Deere's ability to roll out more higher-priced precision agriculture technology in response to demand.

"Deere's earnings beat was driven by the strong equipment pricing environment, which was partially able to offset inflationary costs," said Donnelly.

Smaller rival AGCO Corp last week also reported upbeat quarterly results and outlook, helped by strong demand.

Deere executives told investors on a conference call that Deere still expects to face challenges from pandemic-induced supply chain logjams and inflationary pressures driving up commodity prices for its large equipment, but doesn't believe those headwinds will have an impact on profit.

Deere forecast fiscal 2022 net income between $6.7 billion and $7.1 billion, up from a prior estimate of $6.5 billion to $7.0 billion.

Shares in Deere were down 3% in midday trading as some investors were disappointed by the scale of the raised forecast.

Betting big on its production and precision ag segment, the company is predicting a net sales increase between 25-30% in that segment in 2022 as it beefs up automation solutions to capitalize on demand for smart planting and harvesting.

"The company has been investing for years in farmer productivity and automation because a key challenge that farmers face is that they have peak periods where they need labor around the clock" said Jerry Revich, Head of Americas Machinery, Infrastructure, and Sustainable Tech Research at Goldman Sachs.

Net sales from equipment operations rose about 6% to $8.53 billion for the first quarter ended Jan. 30, beating the Refinitiv-IBES consensus estimate of $8.22 billion.

Net income fell to $903 million, or $2.92 per share, as costs weighed, but still beat the average estimate of $2.38.

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Reporting by Abhijith Ganapavaram in Bengaluru; Editing by Ramakrishnan M. and Nick Zieminski

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