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Deere kills on earnings; drops on revenue worries
08/14/2013 5:43 pm EST
Today before the open the company reported earnings for the third quarter of fiscal 2013 of $2.64 (adjusted for one-time items). Wall Street had been expecting earnings of $2.17 a share. Operating margins rose to 15.5% for the quarter. That was a big improvement from the 12.6% operating margin in the fiscal second quarter and about 2 percentage points above what Wall Street expected.
And that may indeed be the root of the stock’s problem today. Although the company crushed earnings estimates, it didn’t do nearly as well on revenue. Net sales rose just 4.3% in the quarter year over year to $9.32, just a tad ahead of the Wall Street estimate at $9.28 billion. For the full 2013 fiscal year Deere kept to its guidance of a 5% increase in revenue but for the fourth quarter the company said it expects a 5% drop in revenue to $8.59 billion. That’s below Wall Street projections
Think about the implications of that. Deere reported surprisingly high earnings this quarter on a huge jump in operating margins on very modest revenue growth. The company is now saying that revenue growth will turn negative in the fourth quarter and investors have to doubt that Deere can pull anything like another 2 percentage point increase in operating margins out of its hat for the next quarter.
Shares climbed initially today, opening at $84.06, up from the $83.91 close on the good news on earnings. And then preceded to decline as investors absorbed the message of slow revenue growth and the company’s forecast of negative revenue growth for the fourth quarter. At the close the stock traded at $82.34, down 1.87% for the day.
With a bumper crop due in this year’s harvest thanks to the end of droughts from Brazil to the U.S. Midwest crop prices have tumbled. Corn, for example, sells currently for just $4.51 a bushel. That’s down from prices above $8 a bushel on this date in 2012. With that Wall Street is worried that farmers will cut back on purchases of machinery and such farm supplies as fertilizers not so much because farm incomes are falling but because a record or near record harvest will result in a decision to plant fewer acres next year.
Deere noted that even at $4 a bushel for corn, U.S. farmers would still make very good money. But that’s not really the issue. The company lowered its estimates for U.S. farm cash receipts by 2.6% to $379.7 billion from $389.8 billion. Deere’s equipment sales closely track farm cash receipts so that reduction in estimates isn’t good news for Deere’s revenues.
Looking around the company didn’t see any big improvement elsewhere that might offset the drop in U.S. farm cash receipts. In the European Union, demand for farm machinery is likely to be lower as the financial crisis continues to restrict the availability of farm credit and weak national economies make farmers very conservative about spending. In China government subsidies continue to support equipment purchases—but don’t look to rise enough to increase demand and in India the tractor market, according to the company, remains soft.
I like Deere for the long run as one of the best stock plays for growing global demand for food. (That’s why the stock is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com// ) But even great long-term picks backed by long term upward trends experience cycles of rising and falling demand. The stock’s chart shows a negative cross in early July. (That’s where the 50-day moving average falls below the 200-day moving average and it’s often a sign of a further decline ahead.) At the current price Deere has dropped just below the 50-day moving average at $83.60
In other words by waiting for the lower guidance for the fourth quarter to seep out further into the market consciousness you might get Deere at a lower price. Deere has repeatedly bounced off $80-$82 over the last year. But if you’re willing to hold out for a bargain, the price to watch would be the $73-$75 range the stock hit in late August-early September 2012.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Deere as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.