The Global Demographic Tailwind

[DewDiligence]

Deere Beats FY3Q09 Expectations, But There’s a But

[DE is the world’s largest manufacturer of agricultural machinery, which makes it an obvious beneficiary of the Global Demographic Tailwind. As emerging markets become more affluent, their populations will eat more food; moreover, increasing affluence tends to increase the consumption of meat, and this requires more grain—and more ag equipment—than a plant-based diet of the equivalent number of calories. Although the majority of DE’s ag sales are in the US and Canada, these sales are very much a part of the Global Demographic Tailwind insofar as the ag equipment is necessary for the US and Canada to ship their grain harvests to emerging markets.

Ag equipment accounts for about 75% of DE’s corporate sales; the other 25% comes from landscaping equipment and construction/forestry equipment. (Ag equipment and landscaping equipment were recently combined into a single reporting segment.)

DE’s fiscal year ends Oct 31 and the quarter just reported was the third fiscal quarter ending Jul 31; in effect, the surprisingly good 3Q09 results were “borrowed” from 4Q09, which will almost certainly be weak. Although DE remains a compelling LT holding, IMO, the stock is up 83% from its 12-month low and is no longer a screaming buy.]

http://finance.yahoo.com/news/Deere-shares-hit-as-outlook-rb-4291345829.html?x=0&.v=10

›Wednesday August 19, 2009, 2:59 pm EDT
By James B. Kelleher

CHICAGO (Reuters) - Deere & Co (NYSE: DE ) warned on Wednesday that it would barely break even in the current quarter and that it would cut production by as much as a third because of weak demand for construction equipment and a sharp drop in overseas orders for farm tractors.

The news sent its shares down as much as 5.5 percent, though they later recovered some of those losses.

The warning came as Deere reported a higher than expected third-quarter profit as better-than-expected performance in its core agriculture machinery business and in-house finance arm helped offset sluggish sales in construction and forestry equipment.

The world's largest maker of tractors and harvesters, which said it was taking "pretty significant shutdowns" during the quarter in anticipation of lower demand next year, reported a third-quarter profit of $420 million, or 99 cents a share, down from $575.2 million, or $1.32 a share, last year. Sales fell 24 percent to $5.89 billion.

Analysts on average had expected the company to report a profit of 56 cents per share on sales of $5.27 billion.

Analyst Eli Lustgarten of Longbow Research called the results "a clean beat," although 20 cents of the earnings came from non-operating items, including a lower tax rate.

Moline, Illinois-based Deere reiterated its forecast for a full-year net profit of "approximately $1.1 billion."

Since Deere has already reported earnings of $1.1 billion for the first nine months of the year, the guidance implied a break-even or possibly even a marginally unprofitable fiscal fourth quarter.

"They're burying the fourth quarter with these production cuts," Lustgarten said. "And so their guidance is for a marginally break-even quarter."

Analysts had expected Deere to report a fourth-quarter profit of 33 cents a share, according to Reuters Estimates.

During a conference call to discuss the results, Deere said the production cuts would result in one-third fewer production days during the quarter.

"These are some pretty significant shutdowns," Justin Merrimac, an official in the company's investor relations department, told analysts.

Because the fixed costs associated with those idled plants would not go away during the shutdowns, analysts warned the company's actions were likely to pressure margins in the current quarter.

The company said its construction and forestry division was not enjoying any pickup in demand that it could trace back to U.S. emergency economic stimulus package, which is funneling tens of billions of dollars into building projects to help reduce unemployment in the building trade.

Company officials speculated that cutbacks in state and local government spending were probably offsetting the positive benefits of the federal stimulus.

Deere also cut its forecast for corn prices for the 2009-2010 crop year to $3.40 a bushel, up from the December futures price of $3.27-1/2 a bushel but down from a previous forecast of $3.80. Over the past year, corn prices have fallen nearly 60 percent.

Since farm equipment purchases are highly correlated with crop prices, that is likely to mean less demand for the tractors and harvesters produced by Deere and its top rivals, Fiat Spa subsidiary CNH Global NV (NYSE: CNH ) -- which makes Case, New Holland and Kobelco brand equipment -- and Agco Corp (NYSE: AGCO ) -- which makes equipment sold under the Challenger, Fendt, Massey Ferguson and Valtra brand names.

With demand from farmers easing, that puts added pressure on Deere's construction and forestry unit, which competes with Caterpillar Inc (NYSE: CAT ), Komatsu Ltd (Tokyo:6301.T) and Terex Corp (NYSE: TEX ) and has seen demand drop sharply as a result of the worldwide downturn in building.‹