The past quarter has caught Deere (NYSE: DE ) investors on the wrong foot, as a flurry of analysts slapped a ratings downgrade on the stock following the company's muted outlook at the end of the previous quarter. The list of unenthusiastic analysts includes big names such as JP Morgan, Piper Jaffray, CLSA, and UBS. The pessimism proved too much for Deere's stock, which has shed more than 11% in the past three months.
But the real test for investors will come this Wednesday when Deere reports its third-quarter numbers. It will be a critical earnings report because Deere will need to convince its shareholders of its growth story. If recent updates from the industry are anything to go by, Deere shareholders might get some relief Wednesday.
Expect some good news
Cold weather didn't deter farmers in the U.S. from planting record corn and soybean acreage this spring, which also meant a spurt in sales of all forms of agricultural products. Monsanto (NYSE: MON ) , the world's largest seed company, recorded a 3% year-over-year rise in its last-quarter sales of corn seed and traits. North America's largest nitrogen fertilizer producer, CF Industries (NYSE: CF ) , generated record revenue from its nitrogen division during the last quarter. As the leader in farm equipment, Deere shouldn't be far behind.
According to Deere's monthly released data, sales of its row crop tractors and combines outpaced the industry sales growth rate during the months of May and June. That should reflect as higher year-over-year revenue from the company's agriculture and turf division in its upcoming earnings release.
Watch for key markets' performance
Analysts aren't as upbeat about Deere, though, expecting just about 4% growth on its third-quarter top line. But a surprise for investors might be in store, what with peer AGCO (NYSE: AGCO ) recently trampling Street estimates with record growth in its second-quarter earnings, driven by an impressive 13% jump in revenue for its farm equipment. A stellar quarter even encouraged AGCO to upgrade its full-year revenue and earnings guidance.
Even more notable was how AGCO's second-quarter sales from markets like South America and the Asia Pacific climbed more than 20% each, year over year. Even Monsanto and CF are banking on strong Latin American markets for growth during the second half of the year. Since Deere derives more than 35% sales from the markets outside the U.S., investors should pay special attention to how these markets have fared for Deere in its upcoming earnings report.
More importantly, investors should focus on how Deere plans to strengthen its foothold in the international markets, where the real growth opportunities lie. New plants in Brazil and China are under way, but Deere doesn't expect them to start full-scale production before 2015. So how does the company expect to capture opportunities in those markets meanwhile? Look for answers in its upcoming earnings call.
The soft spot
While Deere's agriculture-equipment division is likely to perform well during the third quarter, lower sales from its construction and forestry business could throw a monkey wrench in its numbers. With slow growth in China having ripple effects on global economic activity, Deere had earlier projected a 5% drop in full-year sales from this business.
Unfortunately, it might be worse, considering the recent dismal numbers and morose outlook from construction-equipment leader, Caterpillar (NYSE: CAT ) . Not only did Caterpillar's last-quarter revenue and net income dive 16% and 43%, respectively, the company also lowered its full-year earnings per share guidance by about 7%. Deere investors should prepare themselves for some possible shocks.
Bigger troubles ahead?
In Deere's upcoming earnings release, investors should focus on the company's outlook, and its plans to overcome challenges in the near term. While the construction business remains soft, crop prices have crashed in recent weeks. That might hurt farmers' profitability going forward, which in turn could hurt the demand for Deere's tractors and other farm equipment.
Deere could find growth hard to come by, and investors should note if the company is taking up any cost-cutting measures to maintain margins. Deere might already be doing so, which is why analysts are pegging the company's second-quarter EPS to come in at $2.17, which would be a 10% improvement year over year, even on slow sales growth.
Even if Deere just manages to meet Street estimates, the stock has every chance to inch higher, simply because any growth on the company's top and bottom lines for the third quarter would mean a new record for the company. After the recent hit Deere's stock has taken, even the smallest piece of positive news could be seen as a buying opportunity. In two days' time, you'll know better about where Deere is headed.
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