Deere Looks Set for a Great Quarter
The farmers are out in the fields earlier than usual, the world's consuming essential crops at a faster pace, and the predictions for crop yields are sky-high for the full year. I have told you earlier how some fertilizer stocks are looking like hot bets in such a situation. But are fertilizer makers the only beneficiaries? Nope!
There's one farm equipment maker I really like and consider as a strong play not to be missed: Deere (NYS: DE) .
The lineup to look for
With the growth in population, there is tremendous pressure on farmers to increase the quantity and quality of output. Constrained land availability, depleting natural resources, rapid urbanization, and the growing middle class in developing nations add to the problem. Agricultural productivity, to a large extent, depends on the equipment used. Naturally, farmers across the globe are warming up to automated and advanced machines.
This is where Deere steps in as a leader. It launched the most innovative and technologically advanced lineup of agricultural equipment last year. What Deere achieves with the help of these products should be reflected in its numbers through the year.
Deere is expecting a 15% increase in agricultural equipment sales this year, while peer AGCO (NYS: AGCO) is targeting a 14% jump in its full-year sales. In fact, most manufacturers are expecting higher tractor sales this year. These forecasts may well come true, considering the good start to the U.S. planting season.
Heck of a start
Unusually warm weather and lower output from major corn producers have encouraged U.S. farmers to start planting early. Even better, corn consumption is surpassing traders' estimates. And it's not just corn. Things are looking good for wheat and soybeans, too. Deere predicted lower prices for all three crops this year, resulting in its conservative full-year guidance. However, I feel it may have been a little too cautious with its predictions.
According to official data, the world's biggest corn consumer, China, has already imported 1.3 million tonnes of corn in January and February alone. That's a whopping 75% of all of last year's imports! The nation's also a leading buyer of soybeans and is likely to import 25% more in the first six months this year compared to 2011. China imports most of its corn and soybean from the U.S. As for wheat, favorable weather might push its output in the U.S. above estimates this year.
Naturally, as demand for these crops rises, their prices will likely follow suit. And higher prices are major incentives for farmers to grow more. U.S. corn farming price, for instance, has moved up 6.75% year-to-date, according to the U.S. Department of Agriculture. Deere's next-quarter sales might get a big push, thanks to the strong planting season.
In full swing
What also works in Deere's favor is its presence in the construction equipment market. More than 20% of its revenue comes from this business. Taking cues from players like Manitowoc (NYS: MTW) and Caterpillar (NYS: CAT) , Deere has wisely set foot into the high-potential Brazilian construction market with two new factories. Manitowoc is already building a big crane facility in Brazil, while Caterpillar is eyeing more opportunities across the globe, particularly in China. I'd love to see Deere get a little more aggressive in the Middle Kingdom. The fact that Cat has much of its attention on China is proof enough of the huge growth potential in the market.
Most in the industry are expecting demand for construction equipment to be up this year. Last week Titan Machinery (NAS: TITN) , an agricultural and construction equipment dealer, reported blowout numbers, adding to all the optimism.
The Foolish bottom line
Deere's last quarter may not have satisfied analysts, but its projection for the full year is too good to be ignored: a net income of $3.28 billion, which is way above its record-high net income of $2.8 billion, recorded last year.
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At the time this article was published Neha Chamariadoes not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.