Deere mows down earnings estimates

But the company's share prices drop on revenue worries.

By Jim J. Jubak Aug 14, 2013 6:23PM

It’s not frequently that investors hear a company beat earnings estimates by 47 cents a share and then see its shares fall, but that’s exactly what we’re seeing right now with Deere (DE).

On Wednesday, before the open, the company reported earnings for the third quarter of fiscal 2013 of $2.64 (adjusted for one-time items). Wall Street had been expecting earnings of $2.17 a share. Operating margins rose to 15.5% for the quarter. That was a big improvement from the 12.6% operating margin in the fiscal second quarter and about two percentage points above what Wall Street expected.
And that may indeed be the root of the stock’s current problem. Although the company crushed earnings estimates, it didn’t do nearly as well on revenue. Net sales rose just 4.3% in the quarter year over year to $9.32, just a tad ahead of the Wall Street estimate at $9.28 billion. For the full 2013 fiscal year Deere kept to its guidance of a 5% increase in revenue -- but for the fourth quarter the company said it expects a 5% drop in revenue to $8.59 billion. That’s below Wall Street projections.

John Deere vehicles at a dealer in Longmont, Colo., on August 18, 2010 (© Rick Wilking/Reuters)Think about the implications of that. Deere reported surprisingly high earnings this quarter on a huge jump in operating margins on very modest revenue growth. The company is now saying revenue growth will turn negative in the fourth quarter -- and investors have to doubt that Deere can pull anything like another two percentage point increase in operating margins out of its hat for the next quarter.

Shares climbed initially on Wednesday, opening at $84.06, up from the $83.91 close on the good news on earnings. They then preceded to decline, as investors absorbed the message of slow revenue growth and the company’s forecast of negative revenue growth for the fourth quarter. At the close the stock traded at $82.34, down 1.87% for the day.

With a bumper crop due in this year’s harvest, thanks to the end of droughts from Brazil to the U.S. Midwest, crop prices have tumbled. Corn, for example, sells currently for just $4.51 a bushel. That’s down from prices above $8 a bushel on this date in 2012. Wall Street is worried that farmers will cut back on purchases of machinery and such farm supplies as fertilizers -- not so much because farm incomes are falling, but because a record or near-record harvest will result in a decision to plant fewer acres next year.

Deere noted that even at $4 a bushel for corn, U.S. farmers would still make very good money. But that’s not really the issue. The company lowered its estimates for U.S. farm cash receipts by 2.6% to $379.7 billion from $389.8 billion. Deere’s equipment sales closely track farm cash receipts, so that reduction in estimates isn’t good news for Deere’s revenues.

Looking around, the company didn’t see any big improvement elsewhere that might offset the drop in U.S. farm cash receipts. In the European Union, demand for farm machinery is likely to be lower -- as the financial crisis continues to restrict the availability of farm credit and weak national economies make farmers very conservative about spending. In China, government subsidies continue to support equipment purchases -- but don’t look to rise enough to increase demand and in India the tractor market, according to the company, remains soft.

I like Deere for the long run as one of the best stock plays for growing global demand for food. (That’s why the stock is a member of my Jubak Picks 50 long-term portfolio.)  But even great long-term picks backed by long term upward trends experience cycles of rising and falling demand. The stock’s chart shows a negative cross in early July. (That’s where the 50-day moving average falls below the 200-day moving average, and it’s often a sign of a further decline ahead.) At the current price Deere has dropped just below the 50-day moving average at $83.60.

In other words, by waiting for the lower guidance for the fourth quarter to seep out further into the market consciousness, you might get Deere at a lower price. Deere has repeatedly bounced off $80-$82 over the last year. But if you’re willing to hold out for a bargain, the price to watch would be the $73-$75 range the stock hit in late August-early September 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Deere as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio.

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Tags: DE
Aug 15, 2013 6:45AM
How are their CNG models coming along? Brazil required modification or purchase of bio-diesel farm equipment and distillery rigs. Deere wasn't one of the manufacturers that jumped on the opportunity. It hasn't led the pack in just about any innovation that aligns with the direction of the nation- alternatives. You've got a geezer bandwagon over-bought and falling behind. I think if we banned analysts and had Relevance Panels judging the potential of these business platforms, we'd have businesses trying to be enterprising again, rather than stock traps for retirees.
Aug 14, 2013 11:07PM

Jubaki....Once again you have me putting on my thinking cap...

But thanks for the article Jim, worthwhile information.. And a good read, keep it up.

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