February 16, 2018 / 11:52 AM / 10 months ago

U.S. tractor maker Deere upgrades 2018 outlook on improving equipment demand

(Reuters) - U.S. farm equipment maker Deere & Co (DE.N) on Friday boosted its sales outlook for fiscal 2018, citing strengthening conditions in agricultural and construction markets, sending its shares higher.

The leaping deer trademark logo is seen on a sign outside a John Deere dealership in Taylor, Texas, U.S., February 16, 2017. REUTERS/Mohammad Khursheed

For the past four years, Deere has been battling weak demand for farm equipment as a global grain glut pushed down prices, sending U.S. farm incomes plunging.

Yet, it expects higher demand for large agricultural equipment to lift industry sales in the United States and Canada, the company’s biggest market, by 10 percent during the year.

“Despite range-bound commodity prices, the industry is experiencing stronger replacement demand,” said Brent Norwood, manager investor communications at Deere.

Higher housing starts in the U.S. and increased activity in the oil & gas sector are projected to boost global construction equipment sales by 80 percent in fiscal 2018.

The Moline, Illinois-based company now expects full-year sales to be up 29 percent from a year ago, a 7-percentage-point increase from its previous estimate, helped by its acquisition of Germany’s Wirtgen Group last year and a favorable currency effect.

Equipment sales in the second quarter are expected to increase by 30 percent to 40 percent.

However, Deere cut the full-year net income estimate to $2.1 billion, from $2.6 billion earlier, on U.S. tax reform-related adjustments of $750 million. Adjusted net earnings for the year are projected to be $2.85 billion.

The company’s shares, which have outperformed the S&P 500 this year, were last up about 3.6 percent at $172.88 in mid-day trade on the New York Stock Exchange. The stock has gained over 50 percent in the past year.

SUPPLY CHAIN BOTTLENECKS

Deere’s robust sales guidance comes weeks after Caterpillar’s (CAT.N) upbeat earnings, which benefited from a strong global economy, particularly strength in the United States.

But strengthening demand is also causing supply constraints. Delays in shipping products to dealers hemmed in sales growth in the fiscal first quarter ended Jan. 28 at 27 percent, below earlier guidance of 38 percent.

Deere hopes to fix the bottlenecks by the third quarter.

It forecast a 5 percent year-on-year drop in U.S. net farm cash income this year. But the projected decrease is smaller than earlier estimated.

Declining incomes are weighing on demand for large tractors, which Deere said remains well below mid-cycle levels.

The company swung to a net loss of $535.1 million, or $1.66 per share, including a $965 million charge related to U.S. tax reform in the first quarter. Adjusted net income was $430.0 million, or $1.31 per share.

Reporting by Rajesh Kumar Singh; Editing by Jeffrey Benkoe, Jonathan Oatis and Chris Reese

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