Please ensure Javascript is enabled for purposes of website accessibility

These 3 Companies Are Expecting Trouble Ahead

By Jacob Roche – Feb 13, 2014 at 8:59AM

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

Major customers are planning on delaying purchases in 2014, but should investors be worried?

It's always bittersweet when a company reports good news and then goes on to predict bad news in the year ahead. This is the story with agricultural machinery companies AGCO (AGCO 0.77%), CNH Industrial (CNHI -1.16%), and Deere (DE 0.31%), which all recently reported strong quarters while expressing worry about the upcoming year.

AGCO and Deere both reported record quarters for sales and earnings, with AGCO expecting both to be flat in 2014 and Deere expecting an actual decline, while CNH similarly had a strong quarter in its agricultural division but expects 2014 to be rough.

The reason for the season
One big reason for the pessimism is farmers in the United States are not expected to do much equipment purchasing this year -- and that's putting it lightly. In January, Farm Journal surveyed more than 1,500 farmers and ranchers and asked how many pieces of farm machinery they planned to purchase this year. A whopping 39% said none, while another 25% said they only planned to buy one piece of equipment.

This is especially bad news for Deere, which received 63% of its total sales from the United States and Canada in 2013, so much that it doesn't even bother reporting other geographic areas, simply lumping everything else into "Outside the U.S. and Canada." I've brought this complaint up several times in the past, because even though the United States is a huge market for farm equipment -- it is, after all, the breadbasket of the world -- long-term growth is going to come from less-industrialized regions like Africa, where very few farmers have advanced machinery and produce low crop yields as a result.

While the Farm Journal survey only looked at farmers in the U.S., their reluctance to buy is likely because commodity prices are simply lower than they were a year ago, which translates into lower profits for farms to reinvest in machinery. This is a global problem, so even the more-diversified CNH and AGCO are expecting trouble this year.

The silver lining
The good news is that these companies are not expecting severe declines, and they are coming off record years, so even a modest decline is still a solid performance. CNH estimates revenues for the year will be flat at worst, and may even be up 5%. Deere had the hardest projections, but still reaffirmed its full-year guidance Wednesday, despite analyst expectations that it would revise them about 6% lower.

Over the longer term, agricultural machinery will be very important to feed a growing global population, especially in the less-industrialized areas AGCO is focusing on, areas like China, Africa, and the Commonwealth of Independent States. While the year ahead may be disappointing, any drop in the stock prices of these companies will just be a buying opportunity for investors who can think in years, or even decades, as opposed to just months.

Jacob Roche has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Deere Stock Quote
$438.25 (0.31%) $1.36
AGCO Stock Quote
$132.91 (0.77%) $1.02
CNH Industrial Stock Quote
CNH Industrial
$16.17 (-1.16%) $0.19

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

Related Articles

Premium Investing Services

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