Deere Beats Expectations, Disappoints Investors Anyway
Deere reported earnings last week, but it was the guidance for the rest of the year that drove the stock down about 7%. The company reported record earnings and 9% sales growth, but it lowered guidance for the full year from 6% sales growth to just 5%. As my colleague Rick Munarriz notes, if you read between the lines, it seems that management is predicting a gradual slowdown in sales to a completely flat fourth quarter.
Analysts on the conference call expressed worry that Deere was losing market share, given that broader economic fundamentals seem to be improving. But a look at Deere's competitors shows this is an industry problem. Caterpillar recently revised guidance from a range of $60 billion to $68 billion in sales to a range of $57 billion to $61 billion, and while AGCO raised its guidance, it and CNH are both still expecting only about 5% growth, similar to Deere.
The main problem is that uncertainty regarding government spending is slowing down construction, and the little construction that's going on in North America is further slowed by prolonged wet weather. The spending uncertainty isn't specific to just North America, though. Each of these companies gets its sales from a different mix of geographic regions, but they're all affected by slow growth globally, especially in developed markets such as Europe and North America.
Analysts on the call also questioned what Deere is doing with its historically high levels of cash. At a trailing P/E of 11, the company's stock is fairly cheap right now, so it might make sense to authorize share repurchases. While Deere is investing some of its cash into building capacity in India, China, and Brazil, regions it believes will be essential to future success, it's still holding on to a lot of cash to maintain liquidity in its financial services business.
That sounds like a good idea, if not for the fact that AGCO is making a bold bet by expanding in Africa, which will be a huge opportunity over the next few decades, and both AGCO and CNH have been taking over Latin America. With revenues greater than AGCO and CNH combined, Deere is perhaps big enough to run them out of town whenever it becomes a priority, but the longer Deere waits, the more time its competitors have to establish brand loyalty.
In all, Deere gave investors little to be excited about, despite record earnings. The long-term picture for agriculture companies is still good, but in the short term, Deere may be somewhat disappointing. Add these companies to My Watchlist to see how the picture improves over the coming quarters.
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Deere may dominate agriculture machinery, but Caterpillar is the market share leader in construction, an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand new-report. Just click here to access it now.
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