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Waiting on Mean Green

By Stephen D. Simpson, Simpson, – Updated Nov 15, 2016 at 4:57PM

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Farmers can't use old equipment indefinitely, but they can wait longer than you might like.

Times have been challenging of late for "Mean Green," a.k.a. Deere (NYSE:DE). Although business has been pretty robust in the commercial/consumer business (which includes things like lawn tractors) and the construction/forestry business, all the hype and hope over ethanol hasn't altered the tough environment for agriculture machinery sales.

In my book, Deere had another "making the best of a tough situation" type of quarter. Reported sales were up about 8%, but volumes weren't especially strong. On a more positive note, operating profits were up about 24% -- but you have to go into the company's 8-K filing to learn that.

As I said, performance was led by just about anything that wasn't ag-related. Ag sales were up 1%, but volumes were weaker, and the company saw operating income fall. Take your pick of problems in this sector -- tough conditions in South America, uncertainty over farm bills and tax policies, droughts in some growing regions, and so on. In other words, the same sorts of trouble facing AGCO (NYSE:AG) and CNH (NYSE:CNH) as well.

Elsewhere, performance was, well, greener. Commercial/consumer sales were up 8%, and construction/forestry sales were up 13%, while operating profits were up strongly in both segments. There's mixed news here, too. I'm not sure there's any major looming trouble for the commercial/consumer side (unless Toro (NYSE:TTC) or another competitor really catches fire), but the construction/forestry business might gain problems from the slowdown in residential housing, since Deere is a bit more residentially exposed than Caterpillar (NYSE:CAT) or Ingersoll-Rand (NYSE:IR).

Farmers can't hold out indefinitely on new equipment purchases (though they can hold out longer than you might think). Moreover, if ethanol and biodiesel really are here to stay in both the U.S. and abroad, I'd say that ultimately must lead to increases in cultivated acreage.

That's all well and good for the "buy Deere" thesis, but I have to point out its rather uninspiring history of return on capital and economic value added. Given my belief that those metrics separate the long-term winners from the losers, I can't really get too excited on Deere until it changes.

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

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Stocks Mentioned

Deere & Company Stock Quote
Deere & Company
DE
$334.22 (-3.44%) $-11.91
Caterpillar Inc. Stock Quote
Caterpillar Inc.
CAT
$164.24 (-3.70%) $-6.31
First Majestic Silver Stock Quote
First Majestic Silver
AG
$6.73 (-8.31%) $0.61
Trane Technologies plc Stock Quote
Trane Technologies plc
TT
$147.58 (-0.05%) $0.07
The Toro Company Stock Quote
The Toro Company
TTC
$86.01 (-1.98%) $-1.74

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

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