Deere Battles Farm Slump -- WSJ

Equipment maker says market is stabilizing, but its sales come in below expectations

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 19, 2017).

Equipment maker Deere & Co. continues to face a slog in a troubled U.S. farm economy.

Deere said Friday its farm and construction equipment sales rose 17% in its fiscal third quarter ended July 31, but they fell short of expectations and the company's shares fell 5.4% to $117.31.

Sharply higher sales and profit from Deere's construction and forestry equipment unit helped offset lackluster farm-related sales in North America, Deere's biggest market. Equipment demand abroad was also strong.

U.S. farmers have been reluctant to purchase new equipment as a multiyear slump in grain and livestock prices weighs on their incomes and buying power. Improving crop yields and forecasts for another bumper harvest this year foreshadow a fourth consecutive year of declining U.S. farm incomes.

Across the industry, Deere expects farm-equipment sales in the U.S. and Canada to fall 5% this year. Still, Deere slightly raised its profit forecast for its fiscal year ending Oct. 31 to $2.1 billion and said it expects its own farm and construction equipment sales to rise 10% overall. Deere said market conditions continue to improve, but didn't offer an outlook for its 2018 fiscal year. Third-quarter sales of farm machinery rose 13% to $5.3 billion.

"It does appear the large ag-equipment market is stabilizing," said Joshua Jepsen, Deere's manager of investor communications. "The used-equipment environment is supportive of sales."

Deere said dealer inventories of used equipment have fallen by more than a third since their peak levels in 2014. When such inventories shrink, that can be a harbinger of rising demand for new equipment.

"Farmers' capital purchase patterns are returning now that used-equipment inventories are approaching more traditional levels," said Deere's chief economist, J.B. Penn.

Deere's farm and construction machinery sales in the U.S. and Canada grew by 11% in the quarter but remain down 1% through three quarters.

Elsewhere in the world, sales increased 25% in the quarter, and are up 17% for the year so far.

Record harvests and favorable exchange rates have fueled demand for farm equipment in South America, driving much of the sales gain. Deere expects industrywide equipment sales in South America to rise 20% this year, thanks in large part to booming crop production in Brazil.

"Demand continues to be very strong there," said Tony Huegel, Deere's director of investor relations.

Deere's construction-equipment sales rose 29% from the year-earlier quarter to $1.5 billion, and operating profit more than doubled to $110 million.

The Moline, Ill., company said in June that it plans to purchase German road-paving equipment maker Wirtgen Group for about $5 billion. The acquisition, the largest in Deere's history, would expand the reach of its construction business outside North America.

Overall for the quarter, Deere reported a profit of $641.8 million, or $1.97 a share, compared with $488.8 million, or $1.55 a share, a year earlier. Equipment sales rose to $6.83 billion. Analysts had expected Deere to earn $1.95 a share on net equipment sales of $6.92 billion.

Write to Bob Tita at robert.tita@wsj.com

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August 19, 2017 02:48 ET (06:48 GMT)