Don’t Fight the Uphill Battles With Caterpillar, Deere & Company

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Considering DE stock jumped 4% on Friday in response to surprisingly (and relatively) good Q1 earnings results from Deere & Company (NYSE:DE), it would be easy conclude the Deere & Company — and its close cousin Caterpillar Inc. (NYSE:CAT) — were finally poised for better days; both have been in long revenue droughts.

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The breakout from DE stock may not be one to chase, however. While the numbers were admittedly better than expected, in the grand scheme of things they were still rather anemic. Similarly, CAT stock is still best left avoided until it’s crystal clear the entire global economy is firing on all cylinders.

Deere & Company Tops Estimates, But…

Last quarter, Deere & Company earned $2.03 per share on $7.4 billion in revenue. The bottom line easily topped estimates for a profit of $1.55 per share of DE, though analysts were collectively looking for a top line of $7.53 billion.

Even with the earnings beat, however, both the top and bottom lines fell well short of year-ago levels. Revenue fell 18% on a year-over-year basis, and DE earned $2.65 per share in the equivalent quarter of last year.

The bulk of the 4% jump from DE shares on Friday likely stemmed from an improved outlook. Now, Deere & Company anticipates a bottom line of $1.9 billion for the current year, up from prior forecasts of $1.8 billion.

The revision was prompted by better-than-expected results from DE’s construction and forestry division, despite continued softness in agricultural and mining machinery markets. While the optimism for that one sliver of its product mix may be justified, it’s not enough of a reason to actually own Deere & Company right now.

… Caterpillar and Deere & Company Still Facing Headwinds

Deere & Company isn’t wrong to expect a strong undertow from the construction market.

Although 2014 was an off year for construction — and heavy construction in particular, which really drives big-equipment sales — this year and next year should be much busier for big builders. Specifically, in January the American Institute of Architects predicted a 7.7% uptick in nonresidential construction this year and an 8.2% improvement for 2016.

It’s a nice follow-through on the rebound nonresidential construction saw in the latter half of 2014 … after a slow start to the year. All told, nonresidential construction spending ended last year up 6.6%, with the bulk of that growth coming late in the year.

Following 2013’s complete lack of growth in nonresidential construction though, investors were understandably hesitant to believe there was any real hope on this front until Deere & Company just confirmed it.

Problem: As well as heavy construction (and forestry equipment) may grow for DE this year, it still only accounts for 19% of Deere & Company ‘s total revenue, while agricultural equipment drives about three-fourths of DE sales.

And as it turns out, the agricultural industry is in no position to drive real growth for Deere & Company anytime soon. Farm commodity prices are almost back to last year’s low levels, which were multi-year lows.

Corn, for instance, last traded at $3.60 per bushel. That’s almost back to last summer’s low of $3.43, which was a four-year low at the time and well below the peak price of $6.89 hit in mid-2012. Most crops have seem similar price drops.


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Falling corn prices work against Deere & Company

The prods for the pullback are heroic crop yields this year. Already reaching record levels last year, the U.S. Department of Agriculture (USDA) predicts 2015-2016’s national feed grain supply will even exceed last year’s record-breaking yields. Globally, corn, wheat and other food sources are also expected to exceed last year’s production and/or this year’s actual need.

Indeed, in the very same earnings report Deere pounded its chest regarding a perk-up in the construction equipment market, at acknowledged the current slowdown in the global farming market that’s ultimately crimping the purchase of agricultural machinery … DE’s bread and butter.

Between adequate output and the thin margins driven by feed stocks, farms aren’t apt to be interested in making big capital investments anytime soon.

As for Caterpillar, it has little-to-no presence in the agricultural market, yet does have a significant stake in the construction market; 31% of its revenue is driven by construction equipment.

Caterpillar’s energy and transportation division though — the biggest piece of its business mix — is apt to be suppressed this year as well. As CEO Doug Oberhelman explained in late April after reporting first quarter results:

“The first quarter wasn’t without challenges.  Sales and revenues were off about 4 percent from the first quarter of last year, mining remained weak and construction was down in most regions.  On the plus side, Energy & Transportation turned in another great quarter, although we don’t expect this to continue due to the oil-related portion of the business.”

With oil prices only marginally better now than they were then, investors would be wise to heed Oberhelman’s caution. In fact, Goldman Sachs recently suggested crude oil prices could fall back to $45 per barrel by October.  Caterpillar’s resources division targets miners of all sorts, and neither gold, coal nor any of the major mining industries looking to make major capital expenditures anytime soon either.

Bottom Line for DE and CAT Stock

While many investors often view them as interchangeable, DE and CAT are hardly carbon copies of one another. At this particular time though, Deere & Company and Caterpillar are in the same boat, and that boat is not being lifted because the overall tide isn’t rising.

A little strength on the construction front is hardly a game-changer for either name. Don’t look for much follow-through, if any, from DE on Friday’s gain.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/05/deere-company-still-isnt-buy-neither-caterpillar/.

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