Deere cautious on 2019 profit after recently missing fourth quarter estimate

The company is hoping replacement demand and good crops will increase sales in 2019

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Chicago | Reuters – Deere & Co on Nov. 21 gave a cautious profit forecast for fiscal 2019 after missing quarterly earnings estimates amid a U.S. trade battle with China that has depressed local farm commodity prices and hurt agriculture equipment demand.

The world’s largest tractor manufacturer remained optimistic about prospects for the U.S. farm economy for the coming year, forecasting higher wheat and corn exports offsetting soft demand for soybeans.

Replacement demand for aging fleets, decline in used inventories along with record crop yields in the Midwest will boost industry sales of agricultural equipment by as much as five per cent next year in North America, its biggest market, the company said.

“We are encouraged by the level of replacement demand driving sales at the present time and believe our business will continue to benefit from a gradual recovery in the North American large ag market,” Chief Financial Officer Rajesh Kalathur told analysts on an earnings call.

Industry sales for farm machines were estimated to have risen 10 per cent this year.

Shares were up 4.1 per cent to $144.23.

“We would argue the FY19 guidance big picture is better than headlines imply,” Baird Equity Research analysts wrote in a note.

Deere looks for net income of about $3.6 billion in 2019, translating into $11.10 per share. The average analyst estimate is $11.47, according to Refinitiv data.

Equipment sales are forecast to grow seven per cent in 2019, compared with a 29 per cent jump in fiscal 2018, which ended Oct. 28.

The U.S. trade showdown with China, one of the biggest export markets for U.S. agricultural products, is further squeezing American farmers. Their incomes have been under siege for the past four years amid a global grain glut.

Since Brazil, Argentina and Paraguay are widely expected to cater to Chinese demand for beans, Deere said the rerouting in trade flow patterns will likely increase U.S. exports of the commodity to the South American countries.

Deere is also banking on a growing need for new farm machinery as the U.S. fleet age has reached its highest since 2013.

Trade, forex headwinds

The Moline, Illinois-based company cited trade and foreign exchange uncertainties for the cautious sales outlook.

Deere expects $100 million to $125 million in input costs from U.S. tariffs on Chinese imports next year. Unfavourable foreign currency translation are expected to have about two per cent impact on equipment sales in 2019.

Deere forecast $4.8 billion in cash flow from operations next year, which it intends to spend on dividends and share buybacks. In 2018, the company paid $1.8 billion in dividends and bought back about $950 million of its shares.

Adjusted profit in the fourth quarter came in at $2.30 per share, lower than Refinitiv’s estimates for $2.45, as equipment sales growth halved to 18 per cent from the previous quarter. The company had forecast sales growth of 21 per cent for the quarter.

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