Investors sold off Deere (NYSE: DE) even though the farm equipment manufacturer beat Street expectations with a strong 15% growth in its third-quarter bottom line.
Let's see if the market truly has a strong reason to worry in spite of the good numbers.
The numbers
Deere's revenue from core equipment operations jumped 24% from the year-ago quarter to $7.7 billion as global sales surged 22% and 34% in its agriculture and construction equipment segments, respectively. Sales outside the U.S. and Canada were up by 49% in the quarter.
With the overall agricultural sector witnessing buoyant growth, global demand for farm machinery has been growing. This was the primary factor behind Deere's growing top line, besides currency translation benefits. Peer CNH Global (NYSE: CNH) also reported a surge of 24% in its second-quarter sales driven by high equipment demand. Rising global demand also fueled Caterpillar's (NYSE: CAT) second-quarter sales, pushing it up by 37% from last year.
Backed by a growing top line, Deere's net profits grew from $617 million to $712.3 million year on year.
Where is Deere spending?
The Illinois-based company has considerable cash on its books, with cash equivalents and unlevered free cash flow of $3.2 billion and $647.2 million, respectively. Deere has been spending on new products development and expansions. It expects capital expenditure of about $1.1 billion for the full year.
More than 100 new products will be available in regions such as the former Soviet Republics and EU from 2012. Deere is now focusing on launching products powered with its new, more powerful and fuel-efficient engine technology. This will constitute most of Deere's research and development spending in the forthcoming years.
Deere is also expanding globally. It recently announced plans of building an engine-manufacturing factory in China, delivering better technology to customers in China.
The company has also been returning value to its shareholders. During the third quarter, it purchased shares worth $500 million. Last quarter, the company had also raised its dividend to $0.41 per share, the ninth quarterly dividend increase in seven years.
Outlook
If you flip through the recent earnings of agriculture-based companies, you'll notice how well most of them have performed. Even fertilizer players such as Agrium (NYSE: AGU) and Terra Nitrogen (NYSE: TNH) have done well as an uptick in agricultural activities boosted prices.
Clearly, agriculture is one sector that is giving the economic gloom a beating; and for Deere, its agriculture equipment segment is largest in revenue terms. The environment thus looks sunny for Deere, as rising crop prices encourage farming activities, which in turn translates into higher demand for farm equipment.
Global demand has also been growing in construction, which is Deere's second largest segment. CNH's segmental sales surged 30% in its second quarter, while Terex (NYSE: TEX) reported a 29.5% jump in its second-quarter construction segment sales driven by strong global demand. This again is good news for Deere.
The Foolish bottom line
Deere looks poised for future growth with its expansionary investments. It has also raised its full-year earnings outlook. With good numbers, solid capital investments, and a dividend yield of 2.4%, Deere looks like it's worth a place on your watchlist.
Click here to add Deere to your stock watchlist.
