Today’s earnings report from Deere & Co. (NYSE: DE) overwhelmed Wall Street estimates for the company’s third fiscal quarter. Deere earnings totaled $617 million, EPS of $1.44, compared earnings and EPS in the same period a year ago of $420 million and $0.99, respectively. DE posted revenue of $6.84 billion, up 16% from a year ago. Analysts were expecting earnings per share of $1.24 on $6.52 billion in revenue.
Less than a month ago, Caterpillar Corp. (NYSE:CAT) also posted better than expected earnings and revenues. The company also boosted its annual EPS target and its revenue forecast.
Both companies suffered mightily in 2009, so last year’s poor results figure somewhat into this year’s earnings. After all, the bar was reset at a fairly low position. Still, both companies rebounded better than expected, but for slightly different reasons.
Deere is the world’s largest maker of farm equipment and the global economic recovery, as slow as it is, is having a substantial positive effect on the company’s sales and profits. Sales outside North America rose 16% in the quarter, even though European sales remain depressed. Agricultural and landscaping equipment sales grew 12% in the quarter, and construction and forestry equipment sales jumped 59%.
The big boosts have come from demand for large equipment in the US and for farm equipment in South America, particularly Brazil. Strong crop prices are loosening farmers’ wallets and Deere forecasts that South American sales will be as much as 30% higher in 2010 than in 2009. That’s an increase from an earlier forecast of 25% growth.
Caterpillar has been boosting capital spending as overall sales grew 31% in its second quarter. The company raised its outlook for full-year EPS to $3.85 from a top end of $3.25. Caterpillar expects to benefit from global investment in infrastructure development, especially in South America and Asia. Like Deere, Caterpillar expects no good news from Europe for the rest of 2010.
Deere’s cap is around $28 billion and Caterpillar’s is around $44 billion. Deere’s forward annual dividend yield is about 1.8%, compared with Caterpillar’s 2.6%. Deere’s forward P/E ratio is 13.43, virtually identical with Caterpillar’s 13.70. Deere’s levered free cash flow for the past 12 months is $1.43 billion, while Caterpillar’s is $2.17 billion.
Both companies are well-positioned for growth in heavy equipment, but Deere’s emphasis on farm machinery could give the company’s share a bigger boost. As the sharp rise in wheat prices made clear, threats to the global food supply have ripple effects on fertilizer company shares and, certainly, on farm machinery makers’ shares. Farmers become more willing to buy machinery on credit, and governments are more willing to help with the loans because the payoff is all but certain. No decent government wants to deal with hungry citizens.
Regardless of today’s downturn in Deere and Caterpillar shares, both are looking good for the rest of this year, and both are still well short of mean price targets. Deere’s exposure to the global food supply may make it a somewhat surer play.
As of this writing, Paul Ausick did not own a position in any of the stocks named here.
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