Agricultural and construction machinery giant Deere & Company (NYSE:DE) kicked off the first quarter of its fiscal year by reporting impressive double-digit sales growth. Profit growth lagged, but should grow at least 20% for the full year. Deere's long-term prospects look strong, and though there is still some uncertainty regarding its near-term trends, it looks to be subsiding.

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First Quarter Recap
Net sales advanced 11% to $6.8 billion. Sales of Deere's flagship agricultural and turf machinery rose 8% to account for the vast majority of the total top line at just under 70%. Construction and machinery equipment sales improved a much stronger 22% to grow to nearly 21% of total sales. This unit competes with the likes of pure play rivals such as Caterpillar (NYSE:CAT) and Terex (NYSE:TEX). Financial service revenues related to the leasing of Deere equipment to customers advanced 8% and, along with other revenues that grew a modest 2%, accounted for the remaining 9% of sales. Notably, international sales jumped 21% to $2.5 billion, or nearly 37% of total sales.

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Operating profit advanced 7% to $873 million, which lagged the sales growth. Deere attributed the negative sales leverage to higher raw materials costs and spending related to meeting tougher emissions standards for its equipment. Additionally, international profitability fell 21% to $170 million. Higher corporate expenses further tempered the bottom line increase as net income rose only 4% to $533 million. Share buybacks boosted per-share earnings growth to 8.3% as earnings reached $1.30 per diluted share.

Outlook
Analysts currently project full year sales growth of 15.3% and total sales of nearly $34 billion. Deere said it expects net income of $3.3 billion, or roughly $8 per diluted share for annual growth in excess of 20%. Analysts are currently calling for profits of $8 per share. (To know more about income statements, read Understanding The Income Statement.)

The Bottom Line
Deere's cash flow trends don't look that strong, but are due to the need to build inventory levels to support its rapid growth rate. They are also impacted from flows related to its financial services segment. Total debt of $16.9 billion also looks hefty at first glance, but $13.8 billion of this is again related to the financial services arm. It is a much more reasonable $3.1 billion when looking at the equipment operations.

At the current share price near $84 per share, Deere trades at a very reasonable forward P/E of 10, which is right in line with rivals that include CNH Global N.V. (NYSE:CNH) and Agco Corp. (NYSE:AGCO). However, Deere's market capitalization is more than double the combined market cap of CNH and Agco. It is also the dominant player in the U.S. and growing briskly in international markets. Along with Caterpillar, it is a play on continued global infrastructure buildout, as well as global economic growth and the subsequent need for increased farmable land and agricultural products.


The stock is fast approaching its highs for the year as fears over slowing growth across the world subside. However, it still has some room to recover in the near term, and the outlook over the long haul looks even more promising. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.