Deere sees more pain next year

Deere & Co on Wednesday reported a drop in quarterly earnings that was not as steep as Wall Street expected and gave a less dire outlook than analysts had feared, saying it was well-positioned to weather a worsening slump in demand for its farm equipment.

Chief financial officer Raj Kalathur told analysts on a conference call that while the company “forecasts its third straight year of declines in sales of agricultural equipment, its main business, in fiscal 2016, it also expects to remain solidly profitable.”

“We are forecasting a very healthy level of cash flow of over $2.5 billion in 2016,” Kalathur said. “Our actions and proactively controlling expenses, costs, and managing assets have enabled us to deliver substantially better results than in any of the past downturns.”

Deere expects total equipment sales to drop about 11% in its first quarter, which began on Nov 1, and fall about 7% for the year.

The company also forecast net income attributable to the company at about $1.4 billion for fiscal 2016, down from $1.94 billion in 2015. Analysts on average were expecting about $1.31 billion, according to Thomson Reuters I/B/E/S.

While Deere has managed to beat analysts’ expectations, market fundamentals largely remain weak.

The company relies on the United States and Canada for the bulk of its sales and revenue. But industry sales of high-powered two-wheeled drive tractors in those countries fell 34% in October, the Association of Equipment Manufacturers said.

The US Department of Agriculture expects US net farm income to show a 38% drop to $55.9 billion in 2015.

In Europe, the agriculture market is also under pressure due to lower farm income. And in South America, Brazil has gone further into a recession.

“Deere also faces a glut of used equipment, which could force it to slow production or cut jobs,’’ said Argus Research analyst Bill Selesky.

“Used equipment, especially large tractors in the United States and Canada, remain a challenge,’’ Tony Huegel, Deere director of investor relations, said on the call, “but moving them out of inventory stocks will be a focus in 2016.’’

In the fourth quarter ended Oct 31, net income attributable to Deere fell 45.9% to $351.2 million, or $1.08 per share, from a year earlier. Analysts on average expected 75 cents per share, according to Thomson Reuters I/B/E/S.