Why Deere is Not Cummins

02/14/2013 4:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The farm-equipment company is riding a compelling trend that transcends quarter-to-quarter earnings, writes MoneyShow's Jim Jubak, also of Jubak's Picks.

Deere’s (DE) first-quarter fiscal 2013 earnings, announced yesterday before the market open in New York, and the company's guidance for the rest of the year reminds me—in direction if not in degree—of the earnings Cummins (CMI) reported on February 6.

Like Cummins, Deere announced a substantial 25 cents per share earnings surprise—15 cents for Deere if you back out lower-than-expected tax rates for the quarter. And as at Cummins, sales growth didn’t keep up with the earnings surprise. Revenue climbed 11% year over year to $6.79 billion, just slightly ahead of the $6.74 billion Wall Street consensus.

Then following the earnings announcement, Deere—like Cummins—lowered guidance for the next quarter. Not as drastically as Cummins, which talked of weakness in the first half, but Deere did guide down for the second quarter.

The company lowered sales guidance for the next quarter to $9.78 billion from the Wall Street consensus of $9.83 billion. For the full 2013 fiscal year, Deere told analysts to expect 4% revenue growth to annual sales of $35.5 billion. The Wall Street consensus before the call was $35.3 billion. Deere also raised its forecast for 2013 net income to $3.3 billion, from the consensus $3.2 billion.

The increase in full-year guidance is pretty much a reflection of the just announced first-quarter surprise. In other words, Deere isn’t looking forward to any big jump in farm, construction, or forestry equipment sales in the rest of 2013.

That makes sense, given Deere’s forecast for a slight drop in US farm cash income, to $393.2 billion from $402.5 billion. When farmers have less money, even a little less money, then tend to buy less equipment.

To the degree the company has a problem beyond the normal fluctuations in farm sales that come with weather and commodities prices, it is in the construction and forestry unit. Although farm-equipment sales climbed 16.2% in the quarter year-over-year, construction and forestry sales fell 6.7%. And in contrast to farm equipment, where margins climbed 1.8 percentage points year over year to 14%, margins in construction and forestry came in at a low 5.5%.

So how do you think about this quarter and about Deere? (The stock is a member of my long-term Jubak Picks 50 portfolio .)

I think the continued sales strength in farm equipment, and the continued strong margins in that business, support Deere’s position as one of the best stocks to use to profit from the growth in food prices, which is being driven by increasing global demand for more and better food as world incomes rise.

If there is any weakness in the stock caused by worries over second-quarter earnings after today’s lowered guidance, I’d use it as a chance to add to positions in the stock.

With Deere, I don’t think you have to worry much about industry cycles as you do with a Cummins. This is one to hold as long as the prices for food commodities remain strong, and as long as the market isn’t questioning the long-term uptrend in those prices.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. All my personal portfolio is invested in the mutual fund I manage, Jubak Global Equity Fund. That fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Cummins or Deere as of the end of September. For a full list of the stocks in the fund as of the end of September, see the fund’s portfolio here.

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