The deer depicted in the famous yellow and green logo of farm equipment maker Deere & Company (DE) doesn’t have much to leap about these days, judging from the mixed earnings report that the company released Wednesday before the market opened.
For the fourth quarter of fiscal 2014, Deere posted earnings per share (EPS) of $1.83 on revenue of $8.97 billion, compared to EPS of $2.11 on revenue of $9.45 billion in the same period a year ago. The stock opened at $85.73, about $2 lower than the close the day before.
Also casting a pall over Wednesday’s report was Deere’s projected 20% year-over-year drop in farm equipment sales for 2015 due to lower commodity prices and declining farm incomes.
It was not exactly a bumper crop of good news for DE, but I take a more optimistic (and perhaps contrarian) view of Deere’s prospects.
A Glass Half Full
Consider this: Profits were lower, yes, but they blew the tractor doors off Wall Street’s consensus estimates for EPS of $1.57 on revenue of $7.75 billion. For the full year, Deere hit EPS of $8.63 on revenue of $36.07 billion. This is down from EPS of $9.09 and revenue of $37.8 billion in 2013. Again, despite representing declines, these results again handily beat analysts’ projections, which had called for EPS of $8.35 on revenue of $32.9 billion.
Better yet, there are recent signs of increased manufacturing activity in the U.S. The Institute for Supply Management’s Manufacturing Report for October put the Purchasing Managers’ Index (PMI) at 59%, a significant improvement over the previous month’s 56.6%.
A reading above 50% indicates that the manufacturing economy is expanding; below 50% means contraction. These new PMI numbers suggest that economic activity in the manufacturing sector expanded in October for the 17th consecutive month. The report’s rosy assessment of a wide range of industries warrants a positive outlook for DE stock in the coming year.
A Closer Look at DE Stock
Based in America’s heartland in Moline, Ill., Deere & Co is a legendary maker of tractors and agricultural machinery. But the company also makes a wide range of heavy equipment for several other industries, including construction, trucking and forestry. This equipment is increasingly in demand as manufacturing gathers steam. Trucking, in particular, is a cyclical industry that’s now on the upswing.
Deere’s management rightfully views the U.S. and Europe as “mature” and saturated markets for agricultural equipment with limited growth prospects. That’s why the company is shifting its strategic focus to agricultural opportunities overseas where the need to feed growing populations should lift DE stock over the long haul.
Admittedly, several developing countries that once served as investment havens now face uncertain futures, but a troika of emerging world powers — China, India and Brazil — are eager for agricultural machinery. Deere’s strong reputation and entrenched relationships in those countries give it a leg up over competitors such as Caterpillar (CAT).
Farming Booms Overseas
As the growing consumer classes in China, India and Brazil incorporate more meat in their diets, that creates demand for grain. Local farmers are under enormous governmental and economic pressure to convert greater acreage to farming. Increased crop and soil damage from severe weather caused by global warming is another reason that farmers are desperate for higher agricultural yields.
The result is an overseas boom for Deere and its tractors and equipment. In a shrewd move to differentiate itself from the competition, Deere also has been targeting low-income end users that manage modest farms in China, India and Brazil by providing attractive financing and tractors that are smaller, cheaper and more flexible than American models. Deere is currently building new factories in China. Deere also has won large orders from the Brazilian government for construction equipment to develop infrastructure, as the country prepares to host the Summer Olympics in 2016.
Explosive population growth and the rapid adoption of Western lifestyles in emerging markets require a foundation built by Western heavy machinery. As the symbol of American farming know-how, Deere is positioned to tap this secular, long-term trend.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
