MNeagle
9th April 2010, 08:08 AM
By Shruti Date Singh
April 9 (Bloomberg) -- Jay Armstrong just broke a 50-year family tradition at his Kansas farm: He bought his first major piece of equipment that wasn’t from Deere & Co.
Production cuts and the tightest inventories in the industry have led to a shortage of Deere’s signature green-and- yellow equipment that may be pushing customers to rivals. Armstrong this year ordered a combine attachment from Dragotec USA Inc. that will arrive in May. He said the same part from Deere wouldn’t have been delivered until August.
“They have taken me as a loyal John Deere customer for granted, thinking I will pay whatever and wait however long it takes,†said Armstrong, 57, who grows corn, soybeans and wheat on 2,500 acres in Muscotah. “I used to be blind to all colors but green and yellow, and my color blindness is now gone.â€
Deere’s focus on becoming a “build-to-order company†has helped bolster prices and profit, even as some dealers say they are losing sales. Deere shrank its inventory 28 percent from a year earlier to $2.75 billion on Jan. 31. Inventory as a percentage of sales in the previous 12 months was the lowest of 15 farm and construction equipment makers including Agco Corp. and Caterpillar Inc., according to the most recent filings.
“Deere is playing things very close to the chest,†said Larry Southard, co-owner of a dealership with three locations in central Iowa that has sold Deere products for 50 years. “It means I am losing market share. I suspect we can lose at least a half a dozen deals a month.â€
His dealerships’ sales might be 10 percent to 20 percent higher this year if they had the inventory to meet customer demand and products were shipped more quickly, Southard said.
‘Intense Focus’
A farmer ordering a tractor for row-crops such as corn and soybeans, which are harvested starting in September, may not get the equipment until December or January, Southard said. Some Deere customers will wait for its tractors, combines and planters, while others will turn to competitors, he said. Deere products make up 90 percent of Southard’s business.
Deere’s “intense focus†on managing inventory has improved its performance and allows the company to design better products for customers and expand its markets, said Ken Golden, a spokesman for the Moline, Illinois-based company.
Deere’s 52 percent decline in trailing 12-month profit was smaller than Agco’s 65 percent decline and Caterpillar’s 75 percent drop.
“We have not seen widespread evidence of customers choosing a competitive product as our market shares have remained very comparable to the past,†Golden said in an e- mailed response to questions. “Deere customers want the new features and increased productivity of our products.â€
Smaller Inventories
The agricultural machinery industry as a whole has been trying to reduce inventory, said Henry Kirn, a UBS AG analyst in New York. Deere and Agco had smaller inventories at the end of the most recent quarter than at the same time a year earlier.
Caterpillar, the world’s largest maker of bulldozers and excavators, also cut inventories as part of its effort to increase efficiency, said Jim Dugan, a spokesman for the Peoria, Illinois-based company. Reducing inventory became more important last year as sales dropped amid the recession, he said.
Deere’s inventory as a percentage of trailing 12-month sales fell to 12.3 percent in the quarter ended Jan. 31 from 13.7 percent a year earlier, data compiled by Bloomberg show. Agco increased inventory to 17.9 percent from 16.5 percent, and Caterpillar’s rose to 19.6 percent from 17.1 percent.
“Deere is likely a little ahead as Deere has carried less inventory than its competitors over the last few years,†said Kirn, who rates the shares “neutral.†“Deere has focused on taking inventories out of the channel and becoming leaner over time.â€
‘Remains Strong’
Even after a drop in demand, the price for new and used Deere inventory “remains strong,†Kirn said. Deere forecast prices will rise 1 to 2 percentage points after discounts in fiscal 2010. Prices rose 2 percentage points in the quarter ended Jan 31.
A basic new Deere 9530 four-wheel drive tractor retails for $304,842 and the 9770 corn combine goes for $318,752, according to the company’s Web site.
“It’s better to have not enough than too much,†said Tom Sloan, chief executive officer of Sloan Implement Co., a Deere dealer in Illinois and Wisconsin. “Most Deere people, they will probably wait. They are loyal customers.â€
Growers have to plan equipment purchases further ahead than a few years ago because it’s difficult to find items on dealer lots, said Thayne Larson, a 55-year-old farmer in Belleville, Kansas, who trades in nine to 13 pieces of equipment to dealers each year for newer models.
Other Brands
Larson said he prefers Deere equipment because it has the best resale value. Still, he may be “forced†to look at other brands such as Case and New Holland, he said.
Amsterdam-based CNH Global NV, maker of Case and New Holland equipment, declined comment before its first-quarter earnings report on April 21.
To avoid losing sales, Deere dealer Rick Linenburg sometimes conducts three-way trades with other dealerships.
“I have to scrap and look and trade and do all kinds of things to satisfy that demand,†said Linenburg, a co-owner of Vincennes Tractor Inc. in Vincennes, Indiana.
The company was too pessimistic about the effect of the global recession on North American farmers, who are in “pretty good financial health,†Chief Financial Officer James Field said on a Feb. 18 conference call.
Improving Demand
In November, Deere predicted net sales would decline about 1 percent in the year ahead after falling 19 percent in the 12 months ended Oct. 31. Production tonnage was projected to drop 3 percent.
In February, Deere said its outlook had improved. Sales will increase 6 percent to 8 percent in 2010, and tonnage will rise 5 percent, with demand for tractors and combines higher than expected, the company said.
U.S. farm cash receipts, a key indicator for sales, will rise about 4 percent in 2010 after dropping 11 percent last year, Deere forecast.
“There is sufficient demand to warrant higher production in the current quarter than they originally forecast,†said Stephen Volkmann, an analyst for Jefferies & Co. in New York. “Demand is improving and production will be improving. That would imply there is some room for earnings estimates to go up further.â€
Deere Profit Projections
Deere may post a second-quarter profit of 98 cents a share, the average estimate of 18 analysts surveyed by Bloomberg, when the company reports earnings May 19. Profit excluding some items was $1.11 a year earlier.
Deere now builds a large share of machines based on orders and requests from dealers, rather than forecasts, and has worked to make its response to changing demand “more agile,†said Golden, the company spokesman.
As Deere’s orders improved after its original forecast, the company “responded accordingly and increased production and its expectations for the year,†he said.
Deere rose 22 cents to $60.62 yesterday in New York Stock Exchange composite trading. The shares have increased 76 percent in the past 12 months.
Agco wants to balance its efforts to build more machines to order, which helps reduce working capital, with inventory availability at dealerships, said Andy Beck, chief financial officer of the Duluth, Georgia-based manufacturer. Larger-ticket machinery with specific features is more conducive to orders while compact and utility tractors are more readily available in showrooms.
“We will always be a mix of both processes,†Beck said.
Strategy’s Costs
Fenton, Iowa-based Dragotec, whose dealer sold the combine attachment bought by Armstrong, the Kansas grower, is the distributor of the Drago corn head manufactured by Beinette, Italy-based Olimac, said Joe Bollig, director of marketing.
Farmers are attracted to the product due to “higher quality†rather than lack of availability of competing products, Bollig said.
Armstrong said Deere’s strategy may cost it some benefits of the economic rebound.
“Deere’s business plan of trying to control the supply versus selling a product and providing a service is going to come back and haunt them,†Armstrong said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUVuj7VdOpEg&pos=7
April 9 (Bloomberg) -- Jay Armstrong just broke a 50-year family tradition at his Kansas farm: He bought his first major piece of equipment that wasn’t from Deere & Co.
Production cuts and the tightest inventories in the industry have led to a shortage of Deere’s signature green-and- yellow equipment that may be pushing customers to rivals. Armstrong this year ordered a combine attachment from Dragotec USA Inc. that will arrive in May. He said the same part from Deere wouldn’t have been delivered until August.
“They have taken me as a loyal John Deere customer for granted, thinking I will pay whatever and wait however long it takes,†said Armstrong, 57, who grows corn, soybeans and wheat on 2,500 acres in Muscotah. “I used to be blind to all colors but green and yellow, and my color blindness is now gone.â€
Deere’s focus on becoming a “build-to-order company†has helped bolster prices and profit, even as some dealers say they are losing sales. Deere shrank its inventory 28 percent from a year earlier to $2.75 billion on Jan. 31. Inventory as a percentage of sales in the previous 12 months was the lowest of 15 farm and construction equipment makers including Agco Corp. and Caterpillar Inc., according to the most recent filings.
“Deere is playing things very close to the chest,†said Larry Southard, co-owner of a dealership with three locations in central Iowa that has sold Deere products for 50 years. “It means I am losing market share. I suspect we can lose at least a half a dozen deals a month.â€
His dealerships’ sales might be 10 percent to 20 percent higher this year if they had the inventory to meet customer demand and products were shipped more quickly, Southard said.
‘Intense Focus’
A farmer ordering a tractor for row-crops such as corn and soybeans, which are harvested starting in September, may not get the equipment until December or January, Southard said. Some Deere customers will wait for its tractors, combines and planters, while others will turn to competitors, he said. Deere products make up 90 percent of Southard’s business.
Deere’s “intense focus†on managing inventory has improved its performance and allows the company to design better products for customers and expand its markets, said Ken Golden, a spokesman for the Moline, Illinois-based company.
Deere’s 52 percent decline in trailing 12-month profit was smaller than Agco’s 65 percent decline and Caterpillar’s 75 percent drop.
“We have not seen widespread evidence of customers choosing a competitive product as our market shares have remained very comparable to the past,†Golden said in an e- mailed response to questions. “Deere customers want the new features and increased productivity of our products.â€
Smaller Inventories
The agricultural machinery industry as a whole has been trying to reduce inventory, said Henry Kirn, a UBS AG analyst in New York. Deere and Agco had smaller inventories at the end of the most recent quarter than at the same time a year earlier.
Caterpillar, the world’s largest maker of bulldozers and excavators, also cut inventories as part of its effort to increase efficiency, said Jim Dugan, a spokesman for the Peoria, Illinois-based company. Reducing inventory became more important last year as sales dropped amid the recession, he said.
Deere’s inventory as a percentage of trailing 12-month sales fell to 12.3 percent in the quarter ended Jan. 31 from 13.7 percent a year earlier, data compiled by Bloomberg show. Agco increased inventory to 17.9 percent from 16.5 percent, and Caterpillar’s rose to 19.6 percent from 17.1 percent.
“Deere is likely a little ahead as Deere has carried less inventory than its competitors over the last few years,†said Kirn, who rates the shares “neutral.†“Deere has focused on taking inventories out of the channel and becoming leaner over time.â€
‘Remains Strong’
Even after a drop in demand, the price for new and used Deere inventory “remains strong,†Kirn said. Deere forecast prices will rise 1 to 2 percentage points after discounts in fiscal 2010. Prices rose 2 percentage points in the quarter ended Jan 31.
A basic new Deere 9530 four-wheel drive tractor retails for $304,842 and the 9770 corn combine goes for $318,752, according to the company’s Web site.
“It’s better to have not enough than too much,†said Tom Sloan, chief executive officer of Sloan Implement Co., a Deere dealer in Illinois and Wisconsin. “Most Deere people, they will probably wait. They are loyal customers.â€
Growers have to plan equipment purchases further ahead than a few years ago because it’s difficult to find items on dealer lots, said Thayne Larson, a 55-year-old farmer in Belleville, Kansas, who trades in nine to 13 pieces of equipment to dealers each year for newer models.
Other Brands
Larson said he prefers Deere equipment because it has the best resale value. Still, he may be “forced†to look at other brands such as Case and New Holland, he said.
Amsterdam-based CNH Global NV, maker of Case and New Holland equipment, declined comment before its first-quarter earnings report on April 21.
To avoid losing sales, Deere dealer Rick Linenburg sometimes conducts three-way trades with other dealerships.
“I have to scrap and look and trade and do all kinds of things to satisfy that demand,†said Linenburg, a co-owner of Vincennes Tractor Inc. in Vincennes, Indiana.
The company was too pessimistic about the effect of the global recession on North American farmers, who are in “pretty good financial health,†Chief Financial Officer James Field said on a Feb. 18 conference call.
Improving Demand
In November, Deere predicted net sales would decline about 1 percent in the year ahead after falling 19 percent in the 12 months ended Oct. 31. Production tonnage was projected to drop 3 percent.
In February, Deere said its outlook had improved. Sales will increase 6 percent to 8 percent in 2010, and tonnage will rise 5 percent, with demand for tractors and combines higher than expected, the company said.
U.S. farm cash receipts, a key indicator for sales, will rise about 4 percent in 2010 after dropping 11 percent last year, Deere forecast.
“There is sufficient demand to warrant higher production in the current quarter than they originally forecast,†said Stephen Volkmann, an analyst for Jefferies & Co. in New York. “Demand is improving and production will be improving. That would imply there is some room for earnings estimates to go up further.â€
Deere Profit Projections
Deere may post a second-quarter profit of 98 cents a share, the average estimate of 18 analysts surveyed by Bloomberg, when the company reports earnings May 19. Profit excluding some items was $1.11 a year earlier.
Deere now builds a large share of machines based on orders and requests from dealers, rather than forecasts, and has worked to make its response to changing demand “more agile,†said Golden, the company spokesman.
As Deere’s orders improved after its original forecast, the company “responded accordingly and increased production and its expectations for the year,†he said.
Deere rose 22 cents to $60.62 yesterday in New York Stock Exchange composite trading. The shares have increased 76 percent in the past 12 months.
Agco wants to balance its efforts to build more machines to order, which helps reduce working capital, with inventory availability at dealerships, said Andy Beck, chief financial officer of the Duluth, Georgia-based manufacturer. Larger-ticket machinery with specific features is more conducive to orders while compact and utility tractors are more readily available in showrooms.
“We will always be a mix of both processes,†Beck said.
Strategy’s Costs
Fenton, Iowa-based Dragotec, whose dealer sold the combine attachment bought by Armstrong, the Kansas grower, is the distributor of the Drago corn head manufactured by Beinette, Italy-based Olimac, said Joe Bollig, director of marketing.
Farmers are attracted to the product due to “higher quality†rather than lack of availability of competing products, Bollig said.
Armstrong said Deere’s strategy may cost it some benefits of the economic rebound.
“Deere’s business plan of trying to control the supply versus selling a product and providing a service is going to come back and haunt them,†Armstrong said.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aUVuj7VdOpEg&pos=7