The Global Demographic Tailwind

[DewDiligence]

Deere Raises FY2010 Guidance on Modestly Improved Farm Outlook

[DE’s non-consolidated (i.e. other than financing) sales are about 85% from the Ag & Turf division and 15% from the Construction and Forestry division. Although C&F performance was up impressively year-over-year, the real story is in A&T, where performance strongly outstripped DE’s guidance from only three months ago, causing DE to raise EPS guidance for the FY ending Oct 2010 to $3.04. (The 1Q10 EPS of 0.57 must not be annualized because DE’s business is highly seasonal: the second and third quarters are when most of the money is made.)

At the current price, P/E for the current FY is 19x, but P/S is only 1.0 and there is a huge amount of operating leverage. Moreover, DE’s latest EPS guidance is based on a farm outlook that is only modestly bullish (see slides 8-11 at http://www.deere.com/en_US/ir/media/pdf/financialdata/reports/2010/2010_firstquarter_confcallslides.pdf ), and hence it’s not hard to imagine that DE will beat its FY guidance. In any event, DE is surely one of the world premiere beneficiaries of TGDT; it will have to screw things up pretty badly to not make a lot of money in the next 5-10 years, IMHO.]

http://www.thestreet.com/print/story/10683743.html

›By Scott Eden
02/17/10 - 06:28 PM EST

MOLINE, Ill. (TheStreet) – Deere (DE) emboldened investors on Wednesday with word that orders for its farm equipment are improving so much that it had no choice but to hike its earnings forecast for 2010.

Shares of the big tractor and thresher maker jumped by as much as 8% during Wednesday's regular session, though the stock gave back some of those gains toward the end of the day, closing at $56.48, up $2.70, or 5%. Volume reached 17.4 million shares, more than triple the daily average turnover in the name over the last three months.

Deere told investors and analysts that it now expects a profit of $1.3 billion for 2010, almost 50% more than its prior forecast of $900 million. That translates to $3 a share [actually $3.04], above the $2.56 that Wall Street, on average, was expecting.

Though the company cited such things as positive currency exchange rates for the increase, the real driver behind the revised outlook, Deere executives said, was fundamental -- sales, and especially sales of the company's core product in its core market: farm equipment in North America.

The company said it now expects its total revenue in 2010 to increase by 6% to 8% from the $20.8 billion it booked in the prior year.

The outlook overshadowed a huge earnings beat for Deere. Profit in the fiscal first quarter came to 57 cents a share, destroying the Wall Street consensus target of 19 cents a share, according to a poll of analysts by Thomson Reuters.

Sell-side analysts mostly reacted to the news with an outpouring of praise. Almost begrudgingly, Sterne Agee analyst Larry De Maria upgraded Deere's stock to buy from neutral. In a research note to clients, he wrote, "We have been waiting patiently for a pullback in [Deere] shares to become more aggressive but no longer feel that is likely, barring an outright negative turn in fundamentals... The reasons for waiting no longer exist."

De Maria raised his price target on the stock to $66 from $52. He was particularly impressed by Deere's ability to shift its sales efforts to more profitable pieces of equipment, such as its new, higher-horsepower tractors and combines.

For other professional Deere watchers, though, the company's outlook was somewhat less than transparent. Alexander Blanton, of Ingalls & Snyder, called into question just how much Deere's projected sales growth in 2010 will come from stronger end-user demand -- real demand from real farmers -- and how much from the fact that 2009 saw a vicious decline in dealer inventories of agricultural equipment, a far greater drop than what's likely to occur in 2010, Blanton said.

Unlike Caterpillar (CAT), however, Deere does not disclose changes in dealer inventory levels, making it difficult for analysts and investors to evaluate the veracity of the company's sales forecasts. (Caterpillar's inventory levels fell by $3.9 billion in 2009.)

In other words, Blanton said, "There's very little visibility here."

Like all agricultural companies, Deere's prospects largely depend on crop prices. When the going rates for corn and wheat shoot higher, farmers become more willing to spend on new tractors and new threshers. Crop prices, however, are notoriously unpredictable -- even for the Farmers' Almanac.

Deere nevertheless made predictions for crop prices in 2010, lifting its forecasts for corn, wheat and soybeans. But those new projections are still well below the prices those commodities fetched the year before. (Corn sold for $4.06 a bushel in 2008-2009, for example; Deere is predicting $3.50 a bushel this year).

"That doesn't mean Deere won't meet its sales forecasts," added Blanton. But he wondered aloud whether Deere had fully accounted for the projected crop-price decline in its 2010 sales targets. Maybe it had, he said. "We just don't know. All we can say is: forecasts are uncertain in this business."

Further, said Blanton, even if Deere hits its $3-per-share target for 2010 earnings, it's [sic] stock is still expensive, trading at more than 18 times its closing price Wednesday. "That's way too high for a farm equipment company, considering it's so hard to forecast." [I don’t agree.]

Others are less concerned by the murky inventory issues. "They'll get to three bucks a share," said Eli Lustgarten, an analyst at Longbow Research. "The question is: how sustainable is the demand? We won't know until later this year," when crops are harvested and the relative flushness of North America's farmers becomes clearer.‹