Deere's Guidance Points to a Long Farm Sector Slump

12/12/2014 10:21 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

This farm equipment company's guidance for the agriculture sector's prospects over the short- and medium-term is depressing, however, MoneyShow's Jim Jubak thinks the company's own prospects over the long-term are hopeful.

If you want to get really, really depressed about the near-to-medium-term prospects for the agricultural sector, may I recommend Deere's (DE) December investors presentation? (It's posted on Deere's Web site.)

On the other hand, if you want to read a strong case for Deere's own long-term prospects, I'd recommend the same document. This stock remains in my long-term Jubak Picks 50 portfolio because of that case.

The depressing news? In fiscal 2015 (which ends in October 2015) Deere expects sales of agricultural equipment across the sector to be 25% to 30% lower than in fiscal 2014 in the US and Canadian market, 10% lower in the European Union, 10% lower in South America, and slightly down in Asia. Sales of large agricultural equipment-the big tractors that Deere sells, for example-will drop more than the sector as a whole with big equipment sales falling 40%. That will bring the two-year drop in big equipment sales to about 60%.

Deere expects that its sales will hold up slightly better than that-with sales down 15% in 2015-but we're still talking about a crushing downturn in the sector. Credit Suisse calls it one of the worst US farm downturns ever-made worse by declines overseas.

And yet, Wall Street analysts expect Deere to earn $5.53 a share in fiscal 2015. Granted, that's a huge drop-37% drop in earnings per share-from fiscal 2014's $8.75. But it's still a long way from a loss and a pretty stunning accomplishment in the midst of a 60% drop in sector sales. In fiscal 2016, Credit Suisse expects Deere's earnings per share back to near the $8.75 of fiscal 2014.

That's a pretty good performance for a horrendous sector downturn.

But if you're looking for hope rather than just the assurance that things aren't as bad as they could be, I'd suggest reading deeper into the Deere presentation. The company spends a couple of slides talking about integrating data from farm operations with its equipment. Granted, that doesn't pop right out at you as a big innovation, but it is. And it puts Deere, along with other sector players such as Monsanto (MON), at the leading edge of a big trend in farming. With the cost of farm inputs-fuel, seed, fertilizer, water, etc.-soaring, farmers are looking for companies that can not just sell them products, but that can also do the heavy Big Data number crunching that lets them use those products most efficiently. That's why Monsanto has moved into the weather data business through the 2013 acquisition of The Climate Corp. for $1.1 billion. And why Deere acquired Brazil's Auteq Telematica on December 4.

Auteq Telematica is an onboard software and computer company that specializes in technology solutions for sugarcane growers. The deal expands Deere's presence in Brazil and in the sugarcane industry, but just as important, it is an example on the growing importance of Big Data services in the farm sector. Deere, according to its press release on the deal, sees the acquisition as a way to help customers leverage the data produced by onboard computers used in the equipment that plants, cultivates, and then harvests the sugarcane crop. The important trend here is to put data collection and crunching together with farm equipment in order to increase the productivity of farmers.

Always glad to see a company pushing the envelope like this in the middle of tough times for the sector. As with that strategy at Cummins (CMI), another long-term Jubak Picks 50 stock, competitors have to match these moves while they are stressed by the sector downturn or give up future market share to Deere.

I think there's a good likelihood that Deere will be cheaper sometime in 2015 as investors get discouraged by a farm sector downturn that is likely to drag on, and on, and on.

I'd like to get these shares at $80 or lower. They closed on December 11 at $88.26.

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