Deere & Co reported a stronger-than-expected quarterly profit on Wednesday, and raised its full-year outlook, citing improving business conditions including a recovery in the hard-hit market for construction equipment.
Deere, whose shares rose as much as 4 percent, expects to earn $1.6 billion in fiscal 2010, up from an earlier forecast of $1.3 billion, thanks in part to rebounding building markets.
They're having as hard a time projecting this year as we are, said Longbow Research analyst Eli Lustgarten, referring to the new 2010 outlook -- the company's third estimate.
We knew this was going to be a good year because Deere was very conservative in its outlook for 2010 and limited its inventory and production. So now they find themselves with much stronger demand and tight supply, he added. This year's going to be a terrific year.
The results provided another early look into the management style of the company's new chief executive, Sam Allen, a life-long Deere employee who took over last summer after heading up the company's construction and forestry division for four years.
Although Allen has met with customers, investors and employees and visited Russia, China, Brazil, India, Germany, since taking the helm, he has taken a relatively low profile with the financial press, an approach very much like his predecessor, Bob Lane.
One early pattern is Allen's apparent willingness to surprise Wall Street. The past two quarters, those surprises have been pleasant. But some analysts expressed concern about the huge variance between what Deere promises and what it delivers.
Deere acknowledged that markets in much of Europe remain weak because of troubles in the livestock, dairy and grain sectors, as well as challenging economic conditions in
Central Europe and the Commonwealth of Independent States.
But it predicted strength in agricultural markets in the Western Hemisphere, and rebounding demand for construction equipment even in North America, would outstrip that.
During the recent downturn, only a handful of construction markets, like China, grew. But there have been signs of a modest rebound in some other key markets recently, including the United States.
On Wednesday, a report on the Architecture Billings Index, a leading indicator of U.S. nonresidential construction spending, showed a third consecutive monthly rise in April. The gauge approaches a level that indicates expansion in the sector as the economy recovers, according to an architects' trade group.
Deere predicted worldwide sales of its construction and forestry equipment would rise 30 percent for full-year 2010, saying U.S. construction-equipment markets are showing signs of stabilization.
The Moline, Illinois-based company said that independent rental companies were beginning to purchase earth-moving equipment and that Deere dealers were seeing higher utilization of their rental equipment -- both indications of construction activity.
But Deere, the world's largest maker of tractors and harvesters, was also upbeat about agricultural markets, saying a combination of healthy farm cash receipts, solid commodity prices and low interest rates would lift sales of its distinctive green farm equipment, especially in North and South America.
Deere reported a fiscal second quarter profit of $547.5 million, or $1.28 a share, for the fiscal second quarter ended April 30, up from $472.3 million, or $1.11 a share, for the comparable quarter last year.
Sales during the quarter rose 6 percent to $7.13 billion, led by a 52 percent jump in sales of construction and forestry equipment.
Stripping out one-time items related to U.S. healthcare reform, the company said it made $1.58 a share.
Analysts, on average, expected the company to report a profit before items of $1.09 a share, and a net profit of $1.04 a share, on sales of $6.62 billion, according to Thomson Reuters I/B/E/S.
Deere shares were up about 2.3 percent at $58.46 in early afternoon trading on the New York Stock Exchange.
Alex Blanton, an analyst at Ingalls & Snyder who has been covering the U.S. manufacturing sector for four decades, applauded Deere's apparent success in controlling costs, eliminating waste and making its manufacturing operation more efficient.
But he said the company's back-to-back quarterly earnings beats, and repeated sharp revision of its forecasts, had him worried -- especially since global economic fundamentals were not improving anywhere near as dramatically.
I'd say their forecasting isn't very good, Blanton said. Or maybe they're just playing a game, underpromise, overdeliver. The problem with that is if people catch on to that, then they start raising their numbers above your guidance because they know you're low-balling. Then one day you don't lowball and look out.
(Reporting by James B. Kelleher; Editing by Derek Caney)