Deere hits a slump in demand just when it also faces an internal manufacturing glitch

08/16/2012 12:01 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Short-term bad news from Deere’s (DE) report yesterday of earnings for its fiscal third quarter.

Mid-term bad news from Deere’s forecast today of earnings for the fiscal year that ends on October 31.

For the quarter Deere reported earnings of $1.98 a share. That was well below the $2.32 consensus estimate from Wall Street analysts. The miss was the first in 11 quarters, according to Bloomberg. (Deere is a member of my Jubak Picks 50 long-term http://jubakpicks.com// )

Equipment sales rose 16% year over year, but that trailed Deere’s May forecast of a 25% increase. Revenue of $8.93 billion fell well short of forecasts for $9.53 billion.

Problems came on two fronts. First, sales in international markets—especially China, India and Argentina--came in well short of expectations. Second, delays in new products—in particular on manufacturing and delivery of a new combine—cost Deere sales in all markets and lowered margins. Operating margins for the agricultural unit came in at 14% for the quarter, short of the 15% forecast. In the construction unit margins of 6.8% missed the company’s forecast of 8%.

In the conference call Deere said about 50% of the problem was softer than expected demand and about 50% internal execution on manufacturing and delivery.

For the fiscal year—which essentially means the company’s next quarter since the fiscal year ends in October—Deere said revenue would grow by 13% year over year to $8.93 billion versus the $8.98 expected by Wall Street analysts. For the full year, the company said net income will be $3.1 billion versus analyst estimates of $3.3 billion.

The company maintained a positive forecast for fiscal 2013, saying that it expects to fix its manufacturing and supply-chain problems in short order—These are the kind of problems Deere knows how to fix, said CEO Sam Allen—and the global droughts that have caused slowdowns in farm equipment sales this year will yield to higher sale of farm equipment in 2013 as farmers try to expand production to make up for this year’s bad harvests.

I’d say that Deere faces one or two more tough quarters as the current droughts play out in lower harvests and lower equipment sales. I’d be looking to buy at a low sometime during those quarters for the forecast recovery in 2013.

We’ll get more detail on the extent of the drought in the United States and the effects on farm production when the U.S. Department of Agriculture updates its crop forecasts on August 28.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Deere as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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