Wednesday, February 16, 2011

Earnings Call Puts Deere in the Headlights

Earnings Call Puts Deere in the Headlights

Shares of the 175-year-old machinery giant have quadrupled since bottoming nearly two years ago during the financial crisis. This year alone, they are up about 14% and have reached an all-time high.
That is largely because of the farming boom spurred by record prices for crops such as corn, soybeans and wheat.
Indeed, surging demand for farm equipment is expected to give a substantial boost to fiscal-first-quarter results due Wednesday. Analysts polled by Thomson Reuters expect earnings of 99 cents a share for the January quarter, up from 57 cents a year earlier. Revenue is seen up 33% to about $5.7 billion.
And the run could continue, for a time. Amid a global supply squeeze for many crops, farming has suddenly become one of the hottest sectors. The U.S. Department of Agriculture just raised its 2011 farm-income forecast to about $95 billion, up 20% from last year and about 40% above the past decade's average.
Like any boom, however, the longer it lasts, the greater the risks. Any pullback in crop prices as supply catches up with demand will likely affect Deere shares.
Meanwhile, there are other concerns.
Higher emission standards in the U.S. starting in 2012 and the smaller scale of farms in foreign markets will potentially turn customer demand toward Deere's smaller, less-profitable machines. That, plus rising raw-materials costs, is expected to keep a lid on the company's operating margin this year, according to Jefferies & Co.
With that in mind, Deere also may strike a cautious note in its forward guidance Wednesday. Last week, rival AGCO Corp. said its own fourth-quarter profit more than doubled but warned of margin pressure in 2011.
Deere shares aren't wildly expensive, trading at about 17 times estimated 2011 earnings, compared with an average forward multiple over the past 10 years of 15.2 times, according to FactSet.
The big concern—both for Deere investors and the global economy—is crop prices.
At some point they will turn, probably hitting Deere's shares hard. So while investors may be content to make hay while the sun shines, they should keep a sharp eye out for storm clouds.
Write to Kelly Evans at

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