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Deere Reflects Agricultural Slump

Posted: Aug 26, 2009 11:07 AM by Greg Sushinsky

Tickers in this Article: KUB, CNH, TEX, CAT, DE

Farm and heavy equipment manufacturer Deere & Co. (NYSE: DE) recently reported its third-quarter earnings, with profits falling by 27%. Deere's sales fell worldwide by 25%, as the widespread global recession still plagued machinery orders and production. The company did beat Wall Street expectations, though upon closer examination, investors didn't find much to like about the company's fourth-quarter outlook.

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Watching Expectations
Deere's earnings of $420 million or 99 cents a share versus last year's same quarter of $575.2 million and $1.32 per share trounced Wall Street's expectations of 57 cents a share. However, at least 20 cents of the 99 cents-per-share were due to beneficial charges, and during bear markets it is not uncommon for companies to set the bar low for earnings expectations. Revenue also declined to $5.89 billion from $7.74 billion.

For fundamental or value investors, there are more important things than hitting or missing earnings expectations, like assessing what has actually gone on in the business and where the business is going. Deere maintained that it will still have $1.1 billion in profit for the year, though it expects that the recession will culminate in "the biggest sales drop in 50 years." (See The Value Investor's Handbook to learn value investing techniques.)

Bound by Global Forces
Deere's reported earnings showed that the demand for its farm and construction machinery was off everywhere, in America, western Europe, as well as developing countries. The complex interplay of farm commodity prices, though slightly down but still historically high, has factored heavily into the slackened demand for Deere and other agricultural equipment makers.

Caterpillar, Inc. (NYSE: CAT), Deere's most well-known competitor, is trying to gain a toehold in what it hopes will be a long-term lucrative market by getting into the heavy truck business in China. Terex (NYSE: TEX), another large equipment maker, shows the traditional approach of cutting back in the recession, as it recently announced more layoffs at its plants. Tractor maker CNH Global (NYSE: CNH), responded to its recent second-quarter earnings loss by reducing some of its salaried workforce and tightening up on its receivables. On the other hand, Japanese equipment maker Kubota (NYSE: KUB) was cautiously cited as one of the companies that might show slight improvement in Japan's slowly improving economy.

Deere Stout for the Long Run
Deere and most of these other farm and heavy equipment makers can be stalwarts for the long term, but right now their wheels have been wobbled a bit by the multi-dimensional industry cold spell. Almost nothing has been encouraging recently in the agricultural business, save for the end-product food packagers and sellers. The demand from fertilizer to tractors has thus been turned way down across the globe, and with Deere and the others also engaged in heavy non-farm equipment production, there has been little to cheer about.

Bottom Line
The world is going to have to grow food, fix roads and use tractors and other heavy equipment to do so. Deere will weather this storm, but investors should take their time and gauge the speed and strength of the anticipated recovery. It could continue to be a difficult couple of years, not just quarters, for Deere's business, so bear that in mind. When business picks up, the stocks will be there. (Want to invest directly into commodities? See How To Invest In Commodities to learn how.)

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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