Please ensure Javascript is enabled for purposes of website accessibility

Time to Be Jolly About Big Green?

By Stephen D. Simpson, Simpson, – Updated Nov 15, 2016 at 5:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Will farm equipment upgrades boost Deere's profits?

Times are still a little dodgy in the agricultural sector. Corn prices look to be in the lower third of their range over the last decade, and there are ongoing worries about the state of the beef and chicken export businesses. What's more, times are still pretty tough in major growing regions like Brazil and Argentina.

So what does this mean for that large manufacturer of construction, consumer, and agricultural machinery, Deere (NYSE:DE)? Should investors steer clear of tough times now, or do the odds favor rebound and recovery?

For the little that it's worth, Deere did manage to exceed expectations for the fourth quarter. Revenue growth of 7% and earnings-per-share growth of 11% may not excite some shareholders, but I'd say it's a fair bit better than the year-over-year decline that was expected in earnings.

If you follow CNHGlobal (NYSE:CNH) much, you won't see too much surprising news from Deere in terms of the agriculture market -- North America was pretty strong, Europe was a bit weak, and Latin America was even weaker. But like CNH and others, including Ingersoll-Rand (NYSE:IR), the construction market has stayed firm, and Deere experienced 18% revenue growth and 35% segment operating profit growth here.

I would still expect this to be a good year for construction machinery, and by a stroke of luck, Deere's management agrees with me. The less-good news is on the agricultural side, where it doesn't look like anything will be changing all that fast.

There are many competing theories on what will happen with agricultural equipment in the next few years. On one side, you have the arguments that ethanol production will boost equipment demand, and that the farm sector still has yet to see the replacement/upgrade cycle that boosted companies like Cummins (NYSE:CMI), Paccar (NASDAQ:PCAR), and JoyGlobal (NASDAQ:JOYG) in the trucking and mining sectors. On the other hand, you have the risks that government farm policy changes could change, and the inherent risks that go with agricultural products (poor weather, foreign government actions, etc.).

Whatever the case, I'm still not that enthusiastic about Deere. Big Green is definitely a better-run company than CNH. But the latter idea looks like a more interesting idea to my deep-value sensibilities.

For more Foolish thoughts on machinery:

Paccar is a Motley Fool Stock Advisor recommendation. For more about Tom and David Gardner's market-beating newsletter, click here.

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cummins Inc. Stock Quote
Cummins Inc.
CMI
$204.00 (-1.47%) $-3.04
Deere & Company Stock Quote
Deere & Company
DE
$334.22 (-3.44%) $-11.91
Joy Global Inc. Stock Quote
Joy Global Inc.
JOY
Trane Technologies plc Stock Quote
Trane Technologies plc
TT
$147.58 (-0.05%) $0.07
PACCAR Inc Stock Quote
PACCAR Inc
PCAR
$83.81 (-1.28%) $-1.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.