1 Stock Ready to Explode Next Week

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“The drought had minimal impact on our third quarter results and the same holds true for our fourth quarter forecast” is what Deere (NYSE: DE) said in its earnings call three months back. It’s time for the test.

The stalwart is ready to check in with its fourth-quarter numbers next week, and I just can’t contain my excitement. Peers’ numbers were hopeful, and expectations are pretty good; but the real reason behind my eagerness is something bigger, something that I feel could even set Deere’s stock on fire.

They’re safe

Things didn’t turn as sour, at least for agri-businesses, after the drought. Farmers had crop insurance to fall back on when yields shrunk, and high crop prices meant whatever they had in hand could be sold off at good rates. According to Reuters, 85% of farm land was covered by crop insurance worth a whopping $116 billion this year, and insurance payouts could easily hit a record. In simpler words, farmers needn’t worry about emptying coffers as a result of the devastating drought. And what are the planters going to do with all the cash? Arm themselves for this fall and next spring season, of course.

Low yields this year but firm commodity prices mean farmers have all the incentives to plant every inch of their fields next spring. For support, they’ll need advanced tractors and combines, which is where Deere chips in, and which also tells me Deere’s top line should have headed north in the past three months. Just take cues from what peers had on display during their last quarters to get a better idea.

Strong signals

CNH Global’s (NYSE: CNH) revenue from agricultural equipment business climbed 12% from the year-ago period as sales of high-horsepower combines outpaced industry sales. It was a decent quarter for AGCO (NYSE: AGCO) as well with top and bottom lines gaining 9% and 10%, respectively, from the year-ago period. Its sales from North America were up nearly 51% on robust demand for tractors. While CNH re-affirmed its full-year guidance, AGCO cut back only because a new business line it added recently is battling the downdraft.

Naturally, when smaller companies didn’t quite have a problem selling off their equipment, why should Deere? Latin America is likely to have further added to revenue as demand from the nation picked up ahead of its peak planting season. Moreover, Deere’s sales growth fell short of its own expectations by nearly 9% during its third quarter because of a manufacturing glitch, which it hopes to make up in the fourth quarter. So there are actually quite a good number of factors favoring the company right now.

So Deere’s projections of 13% higher fourth-quarter sales year-over-year could well hit the bull. Wait, analysts are expecting something lower -- an 11.6% rise in revenue. That sounds pretty conservative, but why? Blame Deere’s yellow machines, not the greens.

The Killjoy award goes to…

Deere’s construction and forestry division, which accounts for nearly 20% of total sales, could play spoilsport. Again, peers will tell you why. Caterpillar’s (NYSE: CAT) construction industries division sales were absolutely flat at $4.9 billion in its last quarter, while profits slumped more than 7% from the comparable period last year. Negative currency translation wiped out all gains from higher volumes and prices. Things weren’t any better at Terex (NYSE: TEX). Excluding acquisitions, sales in its last-quarter tripped 8%, out of which 5.4% was on account of currency headwinds. Backlog value slipped 17% from the year-ago quarter.

Apart from sluggish demand, currency headwinds made things tougher for both these companies – a factor that is likely to eat into Deere’s top line growth as well. Deere projects currency translations to hit sales by 4%. That explains why analysts don’t have very high expectations from Deere.

So why should the stock pop?

Analysts are looking at 16% jump in Deere’s fourth-quarter bottom line. The tractor giant has a superb track record of proving the Street wrong (in the right way, that is), and I won’t be surprised if it does it again next week. But that’s not why I think the stock could fly.  

As it will be the fourth-quarter earnings release for Deere, we’ll also be able to take stock of its full-year performance, and that’s where Deere will grab the spotlight. It has outlined 13% higher revenue over 2011 and net profits of around $3.1 billion (that’s 10% higher from last year). Now if I tell you 2011 was a record year for Deere, you’ll know what these projections mean.

Naturally, ending a year chock-a-block with negative news from across the globe, worst-ever drought, slowdown in every critical market, and as many headwinds as one can count on a record deserves a round of applause. And Mr. Market knows only one way of applauding – send the shares in question up!

Click here to add Deere to your stock watchlist that shall enable you to keep a close watch on the company as it turns up with its numbers next week. 


Neha Chamaria 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.

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