Drought Fears? This Stock Could Hammer Them all Next Week
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For an agricultural company that derives more than 60% of its sales from the U.S. and Canada, a severe drought is the last piece of news it would want to hear. Amid the uncertainty, the world’s largest agriculture-equipment maker is set to report its third-quarter numbers next week.
Am I expecting Deere (NYSE: DE) to whiff on its numbers? Certainly not. The stalwart has never failed to surprise the Street. As it gets ready to throw its 175th anniversary party, Deere investors might as well join the dance if earnings top estimates and the outlook stays put.
No problems, Deere!
Deere had earlier projected a 15% rise in its full-year agriculture equipment sales, on expectations of relatively low crop prices. Understandably so, as everyone was betting on record crop plantings in the U.S. then. How things can change in a matter of months.
Plantings might have been on track, but fears of drastically low yields because of drought have pushed prices of major crops like corn to all-time highs. Yet, Deere can’t laugh hard, as it’s a really tricky situation. Farmers have faith on its green beauties, no doubt. But with parched crops and uncertain harvests staring at them, they might not be willing to shell out as much to upgrade or buy new farm equipment as expected earlier, even if higher crop prices offset low yields. So the going might not be as smooth for Deere for the rest of the year, but I don’t think one needs to hit the panic button so soon.
Peers performed really well in their respective last quarters, and none have rolled back their outlook for the full year. AGCO’s (NYSE: AGCO) second-quarter sales climbed 14% and profits jumped a whopping 54% from the year-ago period as demand remained firm across all geographic regions. The company expressed concern over the drought, but isn’t unnerved. In fact, it actually raised its full-year earnings outlook. CNH Global’s second-quarter numbers were comparatively muted. Its agriculture equipment sales were up 5% and total profits rose 11% from the year-ago quarter. The company also reiterated its earlier full-year revenue and profit guidance.
So Deere’s third-quarter numbers shouldn’t disappoint either. Analysts are expecting a 24% jump in its top line and an impressive 37% surge in net profits, and I see no reason why the leader in its field won’t be able to meet, or even beat it.
The better half
If sales in the U.S. dampen things in one division, it could well make up in the other. Most people see Deere as a pure agriculture play, but it actually derives more than 20% of revenue from its construction and forestry segment. And phenomenal numbers from peers have already proved how strong demand for construction equipment in the U.S. is.
The world’s largest construction equipment maker Caterpillar (NYSE: CAT) trampled Street estimates with record second-quarter profits, helped by an 8% jump in sales in its largest division, construction industries. And most of it came from North America. Likewise, sales in Manitowoc’s (NYSE: MTW) crane segment shot up 10% in the second quarter as the American market kept getting stronger. Things weren’t any different for Terex (NYSE: TEX) either, which saw its second-quarter top line rise an impressive 11% (excluding the impact of acquisitions) backed by an uptick in the construction market.
Clearly, there’s no doubt Deere will fare well on this front, as it had in the second quarter. While sales in its ag division rose 11% in that quarter, the construction division clocked a superb 26% jump in sales. This time around too, I am expecting this division to play a critical role in boosting Deere’s top line. Chances are the company might even raise its earlier forecast of a 20% rise in full-year construction equipment sales. But again, the tractor king is known to be conservative especially when it comes to earnings projections. And with economic growth slowing in some white hot markets Deere is investing in (read: China and Brazil), a brighter outlook might take some time to arrive.
The Foolish bottom line
If Deere sticks to its full-year net income projection of $ 3.28 billion, investors should rejoice. Because hitting that will anyway mean another ‘record year’ for the company in the end which would certainly be a feat in these trying times.
Even otherwise, Deere’s stock looks pretty cheap trading at a forward P/E of under 10. Solid balance sheet, good dividends, market dominance – there are plenty of reasons to have Deere in your portfolio from a long-term perspective. I’ll soon give you a detailed insight into the company on all these parameters and more. Just keep watching this space, and click here to add Deere to your stock watchlist to make sure you do not miss out any updates, news and analysis.
Nehams has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
