by Tom Taulli | August 15, 2012 11:47 am
This morning Deere (NYSE:DE) posted an unusually weak quarterly report. Earnings came to $788 million, or $1.98 a share, and revenues were $9.06 billion. Too bad the Street was expecting earnings of $2.32 a share and profits of $9.7 billion. On the news, the Deere shares are off by 7.4% to $74.20.
The company also cut its full-year outlook, saying it expects earnings to be $3.1 billion, down from May’s forecast of $3.35 billion. The analysts’ consensus was for $3.33 billion.
Given all this, should investors stay away from the stock? Or is there an opportunity for a bargain? To decide, here’s a look at the pros and cons:
Mega Operator. In the U.S., Deere has almost half the market for farm equipment. Some of its product offerings include balers, combines, loaders and mowers.
Deere also has a large business in categories like forestry and construction. For example, the company sells equipment like backhoe loaders, log skitters and earthmovers.
Long-Term Trends. Deere should benefit from some major tailwinds. Keep in mind that the world’s population is expected to grow from 7 billion in 2012 to 9 billion in 2050, with much of the growth in Asia and Africa. Thus, agricultural output will need to double during this time. And to do this, farm equipment will be sorely needed.
Valuation. The stock is attractive, with the price-to-earnings ratio at 10. Deere also has a decent dividend yield of 2.3%.
Midwest Drought. It has been the worst in over 50 years and has ravaged the corn crop. As a result, farm incomes have come under pressure, which means less spending on equipment.
And the U.S. is not alone. Other countries, like Argentina, have also suffered from droughts.
Competition. It’s intense for Deere. In the farm equipment market, it has rivals like AGCO (Nasdaq:AGCO), CNH Global (NYSE:CNH), Kubota Tractor (NYSE:KUB) and Toro. In the construction and forestry segment, the big competitors include Caterpillar (NYSE:CAT), Komatsu, Volvo Construction Equipment, Tigercat Industries and Ponsse.
Foreign Markets. This is a key for Deere’s growth strategy. But as seen in the latest quarter, the company has been facing challenges. Consider that economies slowed in countries like India and China. In addition, Deere must deal with tariffs and trade policies. It’s also not easy to build the necessary infrastructure in emerging markets.
For the long-term, Deere’s prospects look bright. In fact, the company believes it can hit $50 billion in revenues by 2018. Unfortunately, it looks like conditions will be fairly weak for the next year. Consider that some U.S. farmers will probably put off equipment purchases until next spring, which will mean a further drag on Deere. It looks like the weakness will continue in foreign markets as well.
So even though Deere’s valuation is attractive, there will probably be no major catalysts to get the momentum back — at least for the rest of 2012. In light of this, the cons outweigh the pros on the stock for now.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
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