Don't Be Fooled by Deere's Results

Could it be that both analysts and investors might have misjudged Deere & Co.'s (NYSE: DE  ) earnings results for the company's fiscal third quarter of 2012? In my infrequently tentative opinion, that might have been precisely the case.

Oh sure, the company missed analysts' expectations by fully $0.33 per share, but that deviation may say as much about our current approach to forecasting as to the new desirability of holding Deere's shares. Until a few years ago, most companies were reluctant to provide forward earnings guidance, leaving analysts to formulate their own models and expectations for quarterly revenues and earnings. The result was a far larger variance among the expectations than exists today, when analysts are able to tuck in comfortably and safely at or near the mid-points of corporate guidance ranges.

A rollercoaster quarter
Unfortunately for Deere, and those who purport to forecast its results, the company's circumstances changed significantly during the quarter, both internally and externally. The result -- with management reluctant to raise its hand and alter guidance repeatedly amid the quarter -- was a set of Wall Street expectations that ultimately became outmoded. Oh, for a return to the prior system, which clearly was a far sterner test of the analysts' individual sagacity.

While the per-share earnings miss was substantial, year-on-year results for the company were actually quite solid. Earnings were $788 million, or $1.98 per share, compared with $712.3 million, or $1.69 per quarter for the comparable quarter in 2011. That bump on the net earnings line represented a 10.6% improvement, and revenue growth of 15% to $9.59 billion. Analysts had expected the per-share number to come in closer to $2.31. That miss resulted in Deere's shares being taken down by 6.3% on Wednesday.

Softening signs from China
We became starkly aware three weeks ago that all was not uniformly rosy for equipment sales across the planet when Caterpillar (NYSE: CAT  ) , while reporting solid results, described a significant softening of demand for its products in China. Deere noted similar sluggishness in such additional countries as India and the European Union.

Despite its spotty geography, however, the company's worldwide equipment operations increased 16% year on year, with 5% higher price realizations matching an identical unfavorable currency translation. Breaking down the equipment unit further, agriculture and turf sales were 14% higher year on year, while the top line for construction and forestry increased fully 23% for the quarter.

New product challenges
The aforementioned internal effects related to what the company termed "manufacturing execution." As CFO Jim Field noted during the company's post-release call:

The all new North American combine line with significant product innovations and IT-F compliant engines was most challenged and accounts for the bulk of the shortfall. The issue is not quality; in fact we are receiving positive customer views on the machines already in the field. We just had trouble ramping up production to meet the aggressive build schedules in the quarter. As a result, we experienced production delays of up to 14 calendar days.  

Looking ahead, management has figuratively pulled in its horns, somewhat, vis-a-vis its sales forecast for the full year. The new target for the October fiscal  year is now $3.1 billion, versus an expectation of $3.35 billion, which was rendered in May. For the individual sector, agriculture and turf sales are expected to expand by about 13% for the full year, with the U.S. and Canada anticipated to contribute more than 10% to the growth. The European Union is likely to be flat, the Commonwealth of Independent States is anticipated to be "up strongly," and both South America and Asia will probably continue to slide.

The Foolish bottom line
For my money, then, while Deere's results fell short of those of Caterpillar, its fellow Midwestern equipment manufacturer, they nevertheless topped those of Amsterdam's CNH Global, with which it competes in certain product lines.

Because our global population is not likely to curb our eating habits, Deere's slowdown in China, India, and Argentina is likely to be temporary. I therefore remain a fan of the company for the long term. However, Caterpillar’s breadth is unsurpassed in this sector, and its extensive service network and unparalleled brand strength combine to give it solid competitive advantages. For investors interested in Caterpillar’s stock, read all about Caterpillar's strengths and weaknesses, plus whether the company is a buy right now in our brand new report. Just click here to access it now.

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter services free for 30 days.      


Read/Post Comments (1) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 16, 2012, at 10:49 PM, TempoAllegro wrote:

    I agree with the author that DE's quarter was misjusdged. But I did not need to wait to hear the analysis to know something was amiss when the stock fell more than 6% when year on year earnings actually went up substantially.

    For me, I noticed something else about the company while poking around yahoo finance in the profile area. The company also makes irrigation equipment. Sure enough, after looking at the company's web site, John Deere Water has very sophisticated water systems that will be sure to be getting a second look in the drought-plagued Western USA.

    With expansion growing apace in emerging markets and the need for excellent farming equipment becoming urgent to serve a burgoening world stomach that is demanding a more sophisticated diet (or at least a more farm-intensive one), I believe DE shares will be a rock-solid part of any discerning investor's portfolio.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1987506, ~/Articles/ArticleHandler.aspx, 8/22/2014 11:59:29 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement