By Rajesh Kumar Singh
CHICAGO (Reuters) – Deere & Co, the world’s largest farm equipment maker, lifted its full-year earnings forecast on Friday after a smaller-than-expected decline in quarterly profit, as the sector benefits from replacement demand and government stimulus.
The Moline, Illinois-based company said it now expects net income of about $2.25 billion for the full year, higher than $1.6 billion-$2 billion estimated earlier.
Quarterly profit came in at $2.57 per share, down just 8.5% year-on-year compared with Refinitiv’s estimates of a 55% drop. Equipment sales fell 12.4% year-on-year, nearly half the pace expected by Wall Street, to $7.9 billion on the back of a recovery in demand for tractors and combines.
Deere’s shares, which have gained 36% since its last earnings report, were up 3.4% at $197.64 in pre-market trade.
Lawrence De Maria, an analyst at William Blair called the quarterly result “exceptional,” indicating “good” management in an economic downturn.
In response to the coronavirus-induced uncertainty and a prolonged slump in the U.S. farm economy, agriculture equipment makers including Deere have cut production to prevent a supply glut and have kept a lid on costs.
This has tightened supplies and driven inventories to below the 10-year average, allowing equipment makers to protect their pricing power. That helped Deere cushion the impact of lower sales on its profit.
Cost cuts, meanwhile, reduced manufacturing and operating expenses. Deere has also launched employee-separation programs [Editor’s note: This is the new euphemism for layoffs] that are forecast to result in annual savings of $175 million.
While the pandemic has lowered commodity prices, further squeezing farmers who are still reeling from the U.S.-China trade dispute, the need to replace aging equipment is driving up sales of small tractors.
President Donald Trump’s $19 billion farm relief program as well as improved planting conditions have also lifted farmer sentiment.
Deere expects farm equipment sales for the year to decline at a slower pace than estimated in May, helped by improved demand in North America and Asia. The forecast for decline in construction and forestry machine sales has also been trimmed.
Reporting by Rajesh Kumar Singh; Editing by Susan Fenton and Steve Orlofsky