Despite a tailwind of growing demand for agricultural products and infrastructure needs, farm equipment maker Deere (DE +1.60%) still expects next year to be one of slowing growth. It reported better than expected fourth-quarter sales results only to temper them with an outlook that was less than upbeat. Where first-quarter sales are expected to be 10% higher than in 2012, the full year is only expected to see a 5% increase in sales, which means there won't be a bumper crop of earnings growth.
Perhaps investors shouldn't be surprised. Caterpillar (CAT 1.39%) also beat expectations last month but said the state of the global economy meant its own future prospects would be plowed under as well.
Like Caterpillar and Manitowoc (MTW 0.37%), Deere is looking to international markets to be the lever it pulls for future expansion. It wants markets outside the U.S. to account for half of its sales by 2018, up from 39% today. CAT gets almost two thirds of its revenues beyond the borders of North America, while Manitowoc, a crane maker for the construction industry, recognizes 56% of its sales from outside the U.S.
Orient express
China, with its burgeoning population and its government's penchant for huge stimulus spending, had raised the hopes of heavy equipment operators and agricultural companies that its abnormal growth rates would fuel expansion across the board. When Beijing said it would be dumping billions more into infrastructure projects a few months ago, CAT, Manitowoc, Joy Global (JOY +0.00%), and virtually the entire mining sector shot higher.
Yet even China can't avoid the laws of economics and gravity, so despite spending more renminbi, it's experiencing a protracted period of lower GDP growth, lower volumes of goods sold abroad, and an urgent need for financial reform. With new leadership being installed, China will be in for a period of upheaval still.
Continental divide
Coupled with Europe's own financial undoing and Deere may find a few ruts to get stuck in. It forecasts Europe will hurt sales by 5% while Asia will be flat because of conditions in China and India. Surprisingly, the U.S. economy that everyone had once given up for dead -- as well as its neighbor to the north, Canada -- is the real powerhouse here. The Bureau of Economic Analysis says U.S. farmers, which account for less than 1% of the economy, provided 11% of the country's exports.
Yet as commodity prices return from their trip to the stratosphere, it may serve to limit the amount of crops that farmers plants. Corn is an essential feedstock -- used not only for consumption, but for ethanol and animal feed as well -- and has a big effect on how farmers react. When crop prices soar, as they did this summer, they tend to plant more of it. While that naturally bodes well for fertilizer stock like Potash (POT +0.00%) and Mosaic (MOS +2.21%), it also impacts agricultural equipment makers like Deere, as the opportunity to increase acreage means greater demand for new and bigger equipment. The converse is also true.
Underpromise, overdeliver
Despite Deere's muted outlook, analysts believe it's just being cautious with its guidance, and that by being conservative, it gives them the chance to raise their outlook as the fiscal year progresses. There are still wild cards with the looming fiscal cliff the U.S. appears likely to go over that might trip up the economy once again.
Regardless of these short-term influences, I agree with management that the tailwinds are stronger than the headwinds. While its stock may stumble further from these levels as any of these factors come into play, the greater opportunity lies in a growing global population that needs to eat, and as the world's largest agricultural equipment company, Deere will benefit. At less than 10 times earnings estimates, it trades at a valuations comparable to Joy Global, Manitowoc, and CNH Global (NYSE: CNH)
While I won't be putting my money into play here, I will be rating Deere to outperform the broad market indexes on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars. You can let me know in the comments box below whether you agree Deere is equipped to handle the opportunities before it.
