Deere in Wall Street’s Headlights

05/19/2011 2:55 pm EST


Jim Jubak

Founder and Editor,

The market apparently decided to be disappointed with Deere’s (DE) quarterly financial report, issued before the market open yesterday, May 18. The stock was down 1.5% as of noon New York time yesterday. And while it’s in the green today, it’s not in the green by much.

I think I understand why (and I care, because Deere is a member of my long-term Jubak Picks 50 portfolio), but you sure have to dig below a lot of good news to find anything to be negative about.

But let’s get the shovels ready, shall we, and see if we can uncover the grounds for disappointment.

For the second quarter of its 2011 fiscal year (the quarter that ended in April), Deere reported earnings of $2.12 a share. That beat Wall Street earnings estimates by 6 cents a share—or a penny a share, if you take account of the company’s lower tax rate for the quarter (which wasn’t figured into analyst estimates.)

Earnings per share grew by 60% year-over-year. Sales climbed by 27% from the second quarter a year ago, to $8.33 billion. (Wall Street was expecting $8.14 billion.)

Revenue in Deere’s construction and forestry unit, a weak business for the company during the economic recovery, climbed by a higher than expected 46%. Farm equipment sales were up 24%. Operating margins were essentially unchanged from the second quarter of fiscal 2010, at 15.2% (vs. 15.1%), but margins were well above the 11.7% recorded in the first quarter.

Disappointed yet? No?

Wall Street was. They were looking for Deere to beat by way more than a penny a share.

Let’s keep digging.

  • Deere increased its guidance for the full 2011 fiscal year. Net sales of equipment are projected to rise by 21% to 23%, the company said, to between $28.5 billion and $29 billion. Compare that to the Wall Street consensus of $28.3 billion.
  • Net income for the year is forecast to climb to $2.65 billion. That’s above the company’s previous guidance of $2.5 billion, and also beats the Wall Street projection of $2.63 billion.
  • The guidance would be even higher, Deere explained, but the earthquake in Japan will cost the company about $300 million in sales in fiscal 2011, and about $70 million in operating profit.

More disappointment for Wall Street. Analysts were expecting, hoping, dreaming that Deere would raise its guidance by more than that. And it didn’t.

Including today’s drop, shares of Deere are now down 13.7% from the April 4 high of $99.24.

I can’t say I share Wall Street’s reaction to these numbers. The trends continue to run in Deere’s direction, and sales and earnings growth remain on track. I think these shares are now a bargain.

Given the global sell off in commodities recently, I certainly can’t say that these shares won’t go lower, but the fundamentals of the farming sector certainly support a buy recommendation.

During its conference call, Deere always gives its update on farm trends as it sees them. This morning, the company raised its forecasts for 2011-2012:

  • for corn to $5.50 a bushel, from $4.90
  • for wheat to $7.25 a bushel, from $6.35
  • and for soybeans to $12.75 a bushel, from $12.35.

It expects total US farm cash receipts to hit $371.4 billion in 2011. That would be a new all-time high, beating the $330.5 billion of 2008. For 2012, Deere projects $366.3 billion, a slight dip from the 2011 record—but still extremely strong.

These projections are important for Deere and its shareholders because farm cash receipts correlate very strongly with farm-equipment sales. The company also said that used-equipment inventories remain very low.

If the shares simply rebound to where they were before this correction, you’re looking at a 14% gain. If earnings continue to grow along with farm income, then this is a $120 a share stock by 2012.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. 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 here.

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