Deere & Co. Stuck in the Mud Brian Graney (TMF Panic)
August 17, 1999
Think your job is tough? At least you're not selling farm tractors for a living. And if you are, those e-mail spams promising that "You Can Make $1000 Per Week Working From Home!!!" are probably looking pretty good right about now.
Some of the worst agricultural product prices in decades have mowed down revenues and earnings at several farm equipment makers, including the Green Machine itself, Deere & Co. (NYSE: DE). The Moline, Illinois-based company reported fiscal Q3 EPS of $0.29, less than a quarter of last year's $1.19 but ahead of the Zacks mean estimate of $0.27. The estimate-beating performance is not as significant as it might seem, though, as analysts really weren't certain where the company's earnings would end up and submitted estimates ranging from $0.10 to $0.40. Worldwide net sales fell by a lesser extent, sliding 18% to just over $3 billion.
Whenever an 18% drop in revenues is coupled with a 76% decline in earnings in the same period, there is some serious margin erosion going on. The continuing falloff in North American demand for Deere's high-horsepower, high-margin tractors and combines has wrecked the company's operating profit margin, which declined to 5.7% from 13.6% a year ago. The company's agricultural equipment business actually had an $8 million operating loss during the period, the first time that has happened since falling farm commodity prices started taking their toll on the bottom line last fall.
After hitting a recent low of $35 7/16 on July 15, Deere's shares had jumped 22% in the past weeks to close at $43 1/4 yesterday on hopes that the ongoing drought across large portions of the U.S. would put some air under crop prices by reducing output. Under such a scenario, demand for Deere's farm equipment might return sooner than expected.
The reality, however, is that the reduction in crop yields is doing little to trim overhanging grain inventories at this point. Incremental proof of that fact came yesterday when the Department of Agriculture said that the total U.S. wheat supply for August is expected to fall by only a measly 14 million bushels from July. That's not a whole lot and won't make much of a dent in the total wheat supply of 3.36 billion bushels, which is the second highest supply in more than 10 years.
The bleak supply outlook will keep agricultural prices low for a while, leading some analysts to forecast that machinery demand may not return until possibly 2001. Consequently, Deere is now expecting North American retail demand for farm equipment to fall 30% to 35% this fiscal year, worse than the 25% to 30% slump the firm forecasted in May and the 20% to 25% drop seen at the beginning of the year.
Since Wall Street cares more about the future than the past, it's not surprising that Deere's stock price fell today on the lowered demand estimate. With the company's shares closely tracking commodity price expectations right now (rather than the intrinsic value of the business), the poor investment return harvest for Deere's shareholders over the past year may continue for some time.