Deere: Good News and Not-So Good News

02/13/2014 11:00 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Good news from this agriculture giant was followed by slightly bad news, writes MoneyShow's Jim Jubak, who says this should serve as a reminder to the cyclical nature of farm and fertilizer stock.

Good news from Deere (DE) on fiscal first quarter 2014 earnings. The company announced earnings of $1.81 cents a share, 28 cents a share above the Wall Street consensus on revenue of $6.95 billion. (Also above Wall Street consensus of $6.76 billion.)

But the company's closely-watched estimate of farm incomes pointed to a drop in cash receipts in 2014 of 7% from the record level of 2013. Global corn planting is likely to fall in 2014, Deere reported.

That's certainly not good news for such agriculture stocks as fertilizer producers Potash of Saskatchewan (POT), Mosaic (MOS), and Yara International (YARIY). And it's not good news for Deere for 2014, as a whole, either. The company lowered guidance for the quarter that ends in April to sales of $9.65 billion, versus the current Wall Street consensus of $9.89 billion. That would represent a 6% drop in sales in the quarter.

Deere's agriculture equipment sales weren't all that robust in the quarter, with sales of farm equipment climbing just 2% year over year. Operating income for that part of Deere's business (78% of sales in 2013) climbed 4%. It was the recovery of sales for construction and forestry equipment that led to the first quarter earnings beat. Sales for those businesses climbed 4%, but operating income grew by 32%.

Deere expects the construction equipment business to continue to outperform in 2014. For the year, Deere guided analysts to a 10% increase in 2014 sales for this unit. Unfortunately, Deere said sales for the remainder of its business are projected to fall by 6% in 2014. That's not surprising since Deere projects industry sales of farm equipment will drop by 5% to 10% in North America, by 5% in the European Union, and by 5% to 10% in South America. Industry sales in Asia will be up slightly, Deere projects.

This slightly negative appraisal—only slightly negative, I'd say, because 2013 was a record year for farm incomes—has been echoed by other companies in the agriculture sector.

On February 11, for example, fertilizer Mosaic said that potash fertilizer prices fell by $130 a metric ton in 2013 and phosphate prices by $150 a ton. Phosphate prices may have bottomed in the fourth quarter, the company said, and recent contracts with China may indicate a bottom for potash, but it will take further increases in demand to produce significant improvement in prices. Mosaic said it doesn't expect any dramatic short-term increase in potash prices, but that it does expect better operating conditions in the second half of the year.

On February 12, Yara International (YARIY in New York or (NO:YAR) in Oslo) reported a huge drop in fourth quarter net income (from NOK 7.21 a share in the fourth quarter of 2012 to NOK 2.64 a share in the fourth quarter of 2013, excluding special items). Volumes climbed 22% on increased sales in Brazil as a result of Yara's purchase of Bunge's (BG) fertilizer business in that country. But prices plunged: Urea prices were 26% lower year over year and nitrate prices fell 15%.

The comments from Deere, and other companies in the agriculture sector, should serve as a reminder that farm stocks remain very cyclical. After the boom and record crops in 2013, the comparisons for 2014 are very difficult. 2014 doesn't look like a bad year—it just doesn't look like we'll see record farm incomes move to a new record.

As a result, Deere is facing its first earnings decline in five years. And the rest of the sector is likely to follow that trend.

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 may or may not now own positions in any stock mentioned in this post. The fund did own shares of Yara International as of the end of December. It did not own shares of Deere, Mosaic, or Potash of Saskatchewan. For a full list of the stocks in the fund, see the fund's portfolio here.

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