Will Deere Earnings Stop Growing Soon?

Deere (DE -0.60%) will release its quarterly report on Wednesday, and already, investors have gotten nervous about the agricultural-equipment maker's future prospects, sending its share price toward its lowest levels in nearly a year. Although most investors expect Deere earnings to grow this quarter, the company's long-term prospects aren't quite as certain.

As demographic and macroeconomic trends have bolstered the worldwide agricultural industry, Deere has been well positioned to take advantage by offering its tools to enhance productivity. Yet farming tends to be cyclical in nature, and after such a long period of good times, some longtime shareholders are likely waiting for the other shoe to drop in the industry. Let's take an early look at what's been happening with Deere over the past quarter and what we're likely to see in its quarterly report.

Stats on Deere

Source: Yahoo! Finance.

What's in the future for Deere earnings?
Analysts have pulled back on their views of the prospects for Deere earnings in recent months. Although they've only cut their July quarter estimates by $0.03 per share, they've slashed more than $0.50 per share from their fiscal 2014 projections. The stock has also responded badly, falling 11% since early May.

You can trace much of the disappointment from Deere recently to its last earnings report back in May, when the company reined in investor enthusiasm about its growth prospects for the rest of the year. Despite reporting record earnings, a drop in full-year growth projections suggested that Deere's sales growth could completely disappear by the fiscal fourth quarter.

Interestingly, though, Deere's stock is responding worse than its peers to challenging conditions, even though its competitors largely share those same concerns. Investors expect European agricultural- and construction-equipment maker CNH Global (NYSE: CNH) to have a similar slowdown in earnings and sales growth, but its shares recently traded at their highest levels of the year. Similarly, AGCO (AGCO -1.44%) pushed up to a two-year high earlier this month even as its earnings growth could dwindle to nearly nothing by next year.

One major concern affecting Deere and its competitors has to do with uncertainty about government spending. Sequestration in the U.S. is only part of the equation, as the recession in Europe has led many governments there to embrace austerity measures that have slowed construction and infrastructure activity and hurt that side of their business. Arguably, that has hurt Caterpillar (CAT 1.58%) and other more industrially focused companies more than it has Deere, but farm subsidies play a major role in the industry, and even they have been under threat of cuts. Moreover, even though Deere focuses more strongly on agriculture, AGCO and CNH have both been focusing on emerging markets in an attempt to bolster their respective brands there, and Deere needs to respond in kind with more expansion initiatives like its renewed push into South America in order to avoid becoming an also-ran in what are likely to remain faster-growing opportunities than it will find in North America.

In the Deere earnings report, watch for the company to detail its growth strategy for the future. More mundane measures like a bigger stock buyback could help push the shares higher, but Deere's earnings growth needs to come from using its well-known brand name and building it up throughout the world.

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