Deere Update: Near Record Isn't Good Enough for Deere, Market Says

05/14/2014 5:00 pm EST


Rising demand for food and more effective methods of producing food in developing countries will likely result in increased demand for agricultural equipment around the world. Find out what MoneyShow's Jim Jubak predicts for the future of one of the world's largest agricultural product suppliers, Deere.

The problem with record years is that they're hard to top.

That's the situation facing Deere (DE) and other stocks in the agriculture sector. After record net farm income in 2013 of $130.5 billion, anything reported in 2014 will be a disappointment.

Today, as it does with every quarterly earnings report, Deere gave its outlook for the farm sector in 2014. Total cash receipts, Deere's preferred method for tracking the money that farmers have to spend on things such as fertilizer, seed, and farm equipment (such as that made by Deere) will fall about 3% from 2013.

In its guidance for fiscal 2014, Deere affirmed prior guidance of $3.3 billion in net income but lowered projected revenue 4% to $33.60 billion. (Previous guidance had looked for a 3% decline in revenue.)

That would give Deere near-record earnings for the full year, Deere told Wall Street analysts today.

And, of course, near record didn't cut it. The stock was down 2.4% as of 3:30 pm New York time today. That brings the stock's one-year return to near zero at a negative 0.01%. Deere is a member of my Jubak Picks 50 long-term portfolio.

Earnings for the second quarter of Deere's 2014 fiscal year came in at $2.65 a share, 16 cents a share above the Wall Street consensus of $2.49. Revenue, however, revenue fell 9.9% year over year to $9.25 billion, substantially lower than the Wall Street projection of $9.58 billion.

Revenue took a hit from unfavorable exchange rates but the big damage came from farmers simply buying less. Equipment sales in the United States and Canada fell by 12% year over year and dropped by 6% outside of North America.

Deere's tour of farm markets around the world projected a modest cyclical recovery for the European Union. In China increases to government subsidies should balance slower economic growth. In India, Deere projects, the government will focus on productivity and increasing farmer income with a focus on mechanization. The gross value of farm production will climb 5% in Brazil, Deere forecasts.

What exactly does all this mean you should do about buying or holding shares of Deere?

I think it's likely that unfavorable comparisons with record and near record years for farm cash flows will gang up to make 2014 a lost year for Deere. So, I wouldn't be in rush to add to existing positions or to create new positions in Deere until the company and investors can start looking ahead to fiscal 2015 with less difficult comparisons to 2014 in the rearview mirror. (Remember that Deere's fiscal 2014 ends in October so year-to-year comparisons for Deere run ahead of those for most companies.) Recent trends in farm prices point to rising profits from pig, beef, and chicken production and that would push farm cash flows higher in fiscal 2015.

It's important to remember that Deere is a cyclical stock but one that operates within a global trend that points to growing demand for food as population increases and incomes rise in the developing world.

When Deere shares move up off a cyclical trough, the move can be quite strong. I added the position in Deere to the Jubak Picks 50 in December 2008. That timing caught a trough in Deere's cycle (as well as a low in the financial markets) that has produced a 150% gain in the stock even though Deere shares haven't netted much of any since the January 2013 high of $93.99.

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, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Deere as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund's holdings almost totally to cash.

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