Deere & Co. (NYSE:DE) is back in form after a soft start to the year. Its shares have gained nearly 8% over the past three months with more and more analysts turning bullish about the farm equipment maker's prospects. Just last week, Deutsche Bank reiterated its buy rating on the stock and planted a price target of $110.
But recent reports from peers are giving out mixed signals. While Caterpillar (NYSE:CAT) reported surprisingly strong sales for its construction equipment in its last quarter, AGCO (NYSE:AGCO) turned in flat Q1 sales and a muted outlook for agriculture equipment. Given the backdrop, will Deere's upcoming second-quarter numbers live up to the Street's expectations and propel shares higher this week, or should investors brace up for some bad news?
Will Deere set another record?
Deere delivered a record second quarter in 2013, and even pulled off a record first quarter for financial year 2014 when it last reported earnings in February. That solid track record raises the bar of expectations from the company. But analysts aren't too excited this time around, and see Deere's Q2 revenue and earnings per share drop 6% and 11%, respectively, year over year.
Key crop prices are down sharply versus last year, raising fears of lower farm receipts, and hence farm income for the year. That has discouraged big-ticket purchases of farm equipment, especially high-horsepower machines. Extreme winter and the resulting delayed spring planting further aggravated the situation, as evidenced by AGCO's numbers – Its Q1 combines sales from North America slipped 7% year over year. In short, Deere's second-quarter numbers could reflect some of that softness as well.
It could be challenging
On a brighter note, Caterpillar's 20% jump in Q1 construction-equipment sales, and an upgraded outlook for the full year bodes well for Deere since it gets nearly 20% revenue from construction and forestry business. Investors can expect the division to perform well and even offset any weakness on the agricultural side when Deere reports numbers this Wednesday.
That said, investors should also remember that year-over-year comparisons could be unusually tough in Deere's second quarter for two reasons: Lower contribution from the company's landscapes business, majority stake in which was sold late last year; and lower production as the company transitioned its larger machines to Tier 4 technology. So despite the positive impact of stronger construction markets, Deere will likely end up with lower revenue versus Q2 2013.
Key updates you shouldn't miss
With farm fundamentals weakening over the near term, investors should focus on Deere's strategies to overcome challenges in its upcoming earnings call. International markets could play a key role in the company's growth going forward -- markets outside the U.S. and Canada accounted for roughly 38% of Deere's total equipment sales last year.
Latin America, in particular, holds great promise. While most agricultural companies rely heavily on the region for sales through the latter half of the year, construction equipment makers are also eyeing the market aggressively. Deere expects to generate a third of its construction-equipment sales internationally this year, with Brazil counting among its priority markets.
In its recent earnings call, Caterpillar mentioned how Brazil has been "reasonably good" for the company so far this year compared to other Latin American countries. At the same time, Caterpillar sounded cautious about the current macro environment in Brazil. Deere recently set up two new factories at Sao Paulo, so any weakness in the market could slow down its growth plans. Keep an eye on those details in its upcoming report.
More money in store for you?
Investors should also keep an eye on Deere's cash flow projections in its earnings call. The company has increased dividends consistently over the past three years -- investors were rewarded with 11% higher dividends in 2013. Deere has also brought back shares worth more than $1.5 billion in each of the past three years. So if the company projects higher cash flows for 2014, investors can safely expect greater dividends and share repurchases going forward.
Why Deere could still trump the Street
Keep an eye on Deere's outlook. It earlier projected 3% lower total equipment sales and 6% lower net income for financial year 2014. While I don't expect a downward revision, chances of improved guidance appear slim as well.
But wait: the Street may have low expectations from Deere's second quarter, but the company has almost always managed to trample Street estimates. I wouldn't call that a coincidence -- Deere is known to be conservative with its guidance, and hence usually fares better in the end. This time could be no different. And an earnings surprise will be enough to push Deere shares to a new 52-week high this Wednesday. Stay tuned for further updates and analysis about the company.
Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.