WSJ
Deere Outlook Cloudy, Slight Chance of Sun
By
Justin Lahart
Nov. 19, 2013 3:45 p.m. ET
Investors have written Deere & Co. the stock-market equivalent of a Dear John letter this year.
Shares of the big agricultural machinery company are down about 4% since the start of 2013, a poor performance considering only about one-tenth of the stocks in the S&P 500 are in the red this year. Declining cash receipts at U.S. farms—the U.S. Department of Agriculture forecasts they will fall 1% this year—as well as weakness in the used-equipment market present a challenging environment for Deere.
When Deere reports results Wednesday, analysts polled by FactSet expect the company to post earnings of $1.90 a share for the fiscal fourth quarter that ended Oct. 31 versus $1.75 a year earlier, an uptick supported by a combination of higher profit margins and fewer shares outstanding.
Sales, on the other hand, are estimated to fall to $8.6 billion versus $9 billion a year ago.
The future doesn't seem so bright either. With the USDA forecasting that farms' cash receipts will continue to fall, analysts expect earnings and sales at Deere, which does most of its business in the U.S., will be lower in the fiscal year that just began than in the one that just ended. The drop in corn prices, which recently fell to a three-year low after the Environmental Protection Agency suggested lowering the amount ethanol refiners are required to blend into gasoline, adds another layer of concern.
Deere is reporting results Wednesday. Pictured, John Deere tractors are displayed for sale in Shelbyville, Ky. Bloomberg
Such worries, though, may already be reflected in Deere's stock, which trades at 10 times expected earnings versus a median price/earnings ratio of 15 times since 1998. Moreover, investors may be giving short shrift to some things that could go right at the company over the next year.
To judge from the USDA's history of conservative forecasts, for example, the outlook for farm receipts may be brighter than it appears. And although the agricultural sector accounts for about two-thirds of Deere's revenue, Morgan Stanley estimates another 15% is from construction, with an additional 6% coming from sales of consumer goods like riding mowers. As the recovery in the U.S. real-estate market expands, those businesses should improve.
Even a little reassurance from the company could make investors decide Deere is worth fawning over.
Write to Justin Lahart at justin.lahart@wsj.com
