Deere Misses Its Own Forecast
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Agricultural machinery leader Deere & Co (NYSE: DE) reported disappointing results for its third quarter Wednesday. Revenue grew 15% year-over-year to $9.6 billion, which was in-line with consensus estimates, but below the firm’s expectations. Earnings grew 17% year-over-year to $1.98 per share, which was nowhere near the Street’s estimate of $2.31 per share. The company cut its revenue growth guidance to 13% from 15%, and slashed its net income prediction by $200 million to $3.1 billion.
Although actual results fell short of expectations, we thought the quarter’s results were decent. On a currency-neutral basis, overall equipment sales increased 21% (versus 16% reported), and both segments contributed to revenue expansion. In its primary segment, agriculture and turf revenue advanced 14% for the third quarter, even though Europe is experiencing severe macroeconomic headwinds and Asia’s economic outlook may not be as rosy as it was a year ago. The US also performed well, growing double digits in the face of nationwide drought.
Somewhat surprisingly, the firm remains bullish about fiscal year 2013 in spite of the poor yields and terrible drought throughout the US and other parts of the world. Though some may suggest the US is heading towards famine, Deere believes the genetic superiority of seeds should mitigate some of the negative effects of drought, indicating some farmers will be able to meaningfully profit from the higher spot prices. Additionally, management provided compelling information regarding the financial position of farmers in the United States. The 10-year average farm income sits at $80 billion, well above previous decades. Deere also noted that 85% of farms have drought insurance and farmers’ balance sheets are pristine. Essentially, farmers have plenty to spend in fiscal year 2013. However, we think the mix could favor seeds from the likes of Monsanto (NYSE: MON) or DuPont (NYSE: DD). Both firms are working on releasing genetically altered seeds that are more drought resistent, mitigating the impact of terrible growing seasons.
Construction and forestry is a significantly smaller part of Deere’s revenue mix, but the segment grew 23% year-over-year to $1.7 billion. US new home starts have been strong, as the results of several homebuilders reporting during the past several weeks have shown. Profitability hasn’t really increased much in the segment, growing just 1% year-over-year in spite of superior pricing. The firm blames higher SG&A, as well as higher raw-material costs as the main drivers of weakness. Deere cut its full-year growth forecast to 17% from its prior guidance of 20%, suggesting the fourth quarter may not be particularly strong. However, this could be a good sign for Caterpillar (NYSE: CAT) if there may be a market share shift in the works . Since Caterpillar is ultimately less leveraged to agriculture than Deere, we do not think necessarily think Deere's weaker than expected guidance will have a negative read-through.
Though macroeconomic headwinds will likely persist, we’re still fans of Deere over the long haul. The firm has a reasonably strong balance sheet, as well as a strong market position and brand name. Admittedly, however, the short-term outlook isn’t fantastic, as indicated by its score of 3 on the Valuentum Buying Index. However, shares are trading near the low-end of our fair value range, so we could become interested in the firm if share-price weakness persists.
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