Droughts in several growing regions around the world are making Deere's (NYSE:DE) famous green sheen take on a bit of dusty brown. With a tough fiscal third quarter and cautious guidance for the immediate future, the stock got clipped a bit in early trading Tuesday.
Overall reported sales grew 11% in the quarter, with worldwide equipment sales rising 6% (excluding the impact of currency). Agricultural equipment sales rose 9% in the quarter, while commercial and consumer equipment sales dropped 3% and construction/forestry sales rose 29%.
Margins were hurt by lower production volumes and ongoing high material costs, and, as a result, net income declined slightly on a year-over-year basis. On a more positive note, the company continues to exercise solid control of working capital -- and receivables and inventories both appear to be in good shape.
As I mentioned, Deere appears to be getting hurt by drought conditions in many buying regions. Southern Europe continues to see a rather nasty drought, and the Midwest U.S. is having problems of its own. Further, Brazilian farmers are experiencing both drought conditions and a strong local currency.
While droughts are certainly bad in the short run, I'm not sure what the impact will be in a few quarters. At this point the Midwestern drought is not comprehensive, and if you're a farmer whose crops survive the drought you'll get better prices for your crops and might have more money to spend on equipment. With a bit of time left to go in the crop season (especially with soybeans), the ultimate impact of this drought remains to be determined, but more than likely it will just be a temporary phenomenon for the company.
There are definitely some positives working in Deere's favor -- a solid management team, good working capital control, new product launches, and the opportunity to sell mowers through Lowe's (NYSE:LOW). That said, the market for farm equipment has momentarily softened, while materials costs have stayed pretty high.
I'd rather own Deere than CNH Global (NYSE:CNH) or AGCO (NYSE:AG), but that's not saying a lot at this point, because I wouldn't really want to own Deere either. If I wanted to own a big machinery company today, I suppose I'd look at Caterpillar (NYSE:CAT) or Kubota (NYSE:KUB) first.
For more heavy machinery takes:
- Is Oshkosh Still Posh?
- Why Does Ingersoll-Rand Look Cheap?
- Deere Divergence
- Investors to Cat: Nice Kitty
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
