After lagging the broader market significantly in 2013, shares of Deere & Company (NYSE:DE) continue to underperform this year, having lost 5% year to date. While low crop prices raises concerns about slowing demand for farm equipment this year, grain exports from the U.S. are trending up, which could support prices going forward. These mixed signals have left Deere investors in the lurch.
Fortunately, investors may get a clearer idea this week when Deere reports its first-quarter numbers Wednesday. But with recent outlook from peers also failing to provide a clear direction, can investors remain hopeful of positive guidance from Deere that could provide its shares the much-needed breather?
Will Deere surprise again?
Unlike 2013 when Deere reported a record first quarter, investors may not have much to look forward to this time as analysts project the company's revenue and net profit to slip 3% and 8%, respectively, year over year.
But Deere has a solid record of beating Street estimates, and I'm not ruling out one this time either, especially if I consider peers' recently reported numbers. AGCO (NYSE:AGCO) reported 6% higher sales for its farm equipment in the last quarter backed by strong demand from the European region, and Caterpillar (NYSE:CAT) surprised the Street with 20% jump in its last-quarter construction equipment sales on strength across all geographic markets.
That said, Deere may still not see that kind of revenue growth. While the construction market in the U.S. is strong -- Caterpillar's last-quarter sales from North America jumped 21% -- agriculture business has weakened, as evidenced by AGCO's flat sales from the market in its last quarter. Given that Deere gets nearly 80% sales from agriculture and North America is its most important market, investors can't be too excited.
Look for this key report
Unfortunately, chances of Deere improving its guidance for 2014 also look slim, since it had already factored in the strength in the construction business when it last guided. In November, Deere projected 6% lower sales from its agriculture and turf equipment but 10% higher sales for its construction and forestry business for financial year 2014.
Investors shouldn't lose hope, though. Just last week, corn prices hit a four-month high after the U.S. Department of Agriculture reported better-than-estimates corn exports from the U.S. Higher corn prices mean larger farm receipts and income for farmers, and hence greater demand for tractors and combines.
The USDA's key crop report, scheduled for release this week, should tell you more about the situation in crop market. If the USDA projects lower corn stockpiles and higher exports, corn prices could bounce back, which bodes well for Deere.
It could still be a record year
While Deere's revenue guidance may not hold much weight since too many variable factors, such as the weather and crop prices, are at play, its profit estimates cannot be overlooked. That's because it also holds the key to how the company plans to boost margins in challenging times.
The good news is that Deere earlier projected a nearly 8% increase in its 2014 net income despite 3% drop in revenue. If Deere reiterates its outlook this Wednesday, investors should be happy because that net income will translate into another record year for the company.
More money coming your way?
Aside from operational performance, investors should look for updates about Deere's product lineup for the year in its upcoming earnings call. With the much-awaited ConExpo exhibition coming at Las Vegas in March, Deere must certainly have some big plans up its sleeves. At least eight new machines are expected to go on display at the exhibition, and investors should look for details about them in the company's upcoming call.
Also look for updates about Deere's tie-ins with DuPont and Dow Chemical announced during the last quarter. Deere plans to take advanced precision farming and field-management techniques to more farmers through these collaborations. Those areas must have great growth potential; otherwise, such big names wouldn't join hands.
The key takeaway for shareholders from Deere's earnings report will be the company's cash flow projections for 2014. It announced an extended share buyback program worth a whopping $8 billion in December. Deere is financially sound, and has consistently returned at least 50% of its operating cash to shareholders as dividends and share repurchases. The company had earlier projected lower capital expenditure for 2014, which could also boost its free cash flow. For investors, these are critical areas that need to be watched for when the company reports this week, and any positive news could push shares higher.
Weaker farm economics may cut into Deere's profit growth, but an improving construction market is good news nonetheless. Deere is also gaining traction in international markets, which could play a key role in determining the company's fortunes in the near future. So investors shouldn't panic if Deere disappoints on its first quarter. In fact, any weakness in share price this week could be an opportunity, since the pessimism may have already been factored into its valuation.
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Neha Chamaria has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.