Deere third-quarter earnings miss estimates as costs pinch

By Rajesh Kumar Singh

CHICAGO (Reuters) - Deere & Co's profits in the third quarter missed Wall Street estimates on higher raw material and freight costs, sending shares 3.3 percent lower.

The world's largest manufacturer of tractors and harvesting combines did not change its full-year earnings forecast, banking on replacement demand for large agricultural equipment. It is "confident" it would deliver adjusted net income of $3.1 billion in the fiscal 2018, it said in its Friday quarterly report, versus $2.2 billion in fiscal 2017.

JP Morgan analysts said that would translate into $9.45 per share, lower than the estimate of $9.53.

Adjusted profit in the latest quarter jumped 31 percent year on year to $2.59 per share, but was still below the average analyst estimate of $2.75. The cost of production as a percentage of net sales increased to 77 percent from 75.2 percent in the second quarter.

Total equipment sales in the latest quarter jumped 36 percent from a year ago to $9.3 billion.

The stock fell $4.47 to $132.88. Deere's shares have fallen about 19 percent since mid-February.

The Moline, Illinois-based company said it was addressing cost pressures by keeping a lid on expenses and price increases.

"Cost pressures are limiting the strong volume performance," said Stephen Volkmann, an equity analyst at Jefferies.

Deere is not the only company facing cost headaches.

U.S. President Donald Trump's recent tariffs on steel and aluminium imports have inflated raw material costs for U.S. manufacturers. Caterpillar said last month that tariffs were estimated to inflate material costs in the second half of 2018 by up to $200 million.

Deere has been battling tepid demand in North America, its biggest market, for the past four years as U.S. farm income has more than halved since 2013.

Improving demand to replace aging fleets was widely expected to lift overall farm equipment sales this year, but depressed U.S. agricultural commodity prices due to the ongoing trade showdown with China and other major trading partners have dampened those hopes.

Reports from Midwest Federal Reserve banks all point to growing stress in the farm economy.

Yet, Deere, which finances farmer equipment purchases, expects a lower provision for credit losses and reduced losses on lease residual values this year.

Deere still sees industry sales of agricultural equipment in the United States and Canada rising about 10 percent in 2018, led by higher demand for large equipment.

It also lifted its forecast for global sales growth for agriculture and turf machinery to 15 percent in fiscal 2018 from 14 percent.

(Reporting by Rajesh Kumar Singh; Editing by Jeffrey Benkoe and Bill Trott)