Investors fret over Deere's sales growth

The stock takes a post-earnings fall as questions arise about sales and incremental margins.

By Jim J. Jubak Feb 15, 2012 6:17PM
Image: Corn field (© Bob Rashid/Brand X/Corbis)With a cyclical stock -- even a cyclical stock such as Deere (DE) that's riding a long-term, multi-decade upward trend in global demand for food -- investors are always looking for signs that the cycle is near a top. 

I think that explains the 5.4% drop for Deere's shares after the company announced earnings for the first quarter of fiscal 2012. (Deere is a member of my long-term Jubak Picks 50 portfolio.)

The problem was the discrepancy between Deere's big beat on earnings -- the company reported $1.30 a share versus the Wall Street consensus of $1.23 -- and its relatively tepid sales growth for the quarter of just 8% from a year earlier. The discrepancy continued in the company's guidance for the rest of 2012.

The selling Wednesday was based on the big question raised by that discrepancy. Is this a top -- a temporary top -- in sales for Deere? Answering that question got more urgency from Deere's projection that farm cash receipts in the United States would be lower than the company previously forecast, at $371.9 billion for the 2012-2013 farm session instead of the earlier $374.2 billion projection.

For all of fiscal 2012, Deere increased its net income guidance by $75 million to $3.275 billion or $8.02 a share. That's well above the Wall Street estimate of $7.81 a share.

But the company left its guidance for total sales growth at 15% with higher pricing accounting for four percentage points of that growth.

Slower sales growth eventually translates into slower earnings growth and Deere gave analysts worried about that potential problem just enough to fret over. Overall operating margins in agricultural equipment, for example, were a solid 12.2%, but the incremental margin -- which is the margin on added sales in the quarter -- fell to 5%. If incremental margins are falling, it's sometimes a sign that a company is cutting deals with bigger discounts to keep sales growing. And that would be a sign that the best of the agricultural equipment cycle is behind Deere.

No one knows, based on this one quarter's worth of data, whether or not the farm equipment cycle has peaked. But Deere’s stock price Wednesday took a beating because Wall Street thinks, if I can judge from analyst reports I've read in the last week or so, that the cycle is agricultural equipment is closer to a top than the cycle in trucks or mining or construction. Deere's own results added to that possibility with the company noting that it expects its construction division to be its fastest-growing unit in 2012 just adds weight to that belief.

My guess is that part of today's selling is coming from Wall Street investors who are rotating out
of Deere and into shares of companies such as Caterpillar (CAT) or Cummins (CMI) that are in equipment sectors that are seen as further from their peaks.

I don't think any of this changes the long-term picture for Deere -- it is still a stock to own for its exposure to the growing global demand for food and protein in particular. But it does suggest that the stock may lie fallow for a while. If you're an active trader, you might want to follow the Wall Street rotation into Caterpillar and Cummins. If you're more patient, you might want to use this fallow period for building up positions on Deere when the stock is relatively out of favor.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Cummins and Deere as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Feb 16, 2012 4:36PM
This is a joke.  The company does a great job and the stock goes down.   Somewhere there is a manipulation going on so that a true killing can be made.  This is a great company with a great future.  Somehow the price will go down enough that long termers will exit and be left holding the bag.   The vultures will fall in and reap the rewards.  This is nothing short of criminal.....Who makes this crap up.  
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
264 rated 2
485 rated 3
679 rated 4
640 rated 5
617 rated 6
632 rated 7
493 rated 8
276 rated 9
153 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.