Deere sees weak sales

(Reuters) — Fourth quarter earnings at Deere & Co. did not fall as much as Wall Street expected, and the company gave a less dire outlook than analysts had feared, saying it is well-positioned to weather a worsening slump in demand for its farm equipment.

Shares of the maker of John Deere equipment rose following the report.

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

“We are forecasting a very healthy level of cash flow of over US$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 11 percent in its first quarter, which began Nov. 1, and fall about seven percent for the year.

Deere also forecast net income attributable to the company at $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.

Deere may have beaten analysts’ expectations, but market fundamentals largely remain weak.

The company relies on the United States and Canada for the bulk of its sales and revenue. However, industry sales of high-powered four-wheel drive tractors in those countries are down 42 percent in the first 10 months of the year, the Association of Equipment Manufacturers said. Sales of combines are down 35 percent in the same period, but small tractors of less than 40 horsepower are up eight percent.

The U.S. Department of Agriculture expects U.S. net farm income to show a 38 percent drop to $55.9 billion in 2015.

In Europe, the agriculture market is also under pressure because of 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, said Tony Huegel, Deere’s director of investor relations. However, 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 percent 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.

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