Deere & Co. will report its fourth-quarter earnings next Wednesday, November 25. In a preview to the release and conference call, Ann Duignan, machinery analyst for JP Morgan provided some insight into what news may be forth coming when the world’s largest manufacturer of farm machinery releases its earnings report.
Compared with other heavy equipment manufacturers year to date, Duignan says that Deere’s stock has underperformed its peers, which is up 28% vs. S&P Machinery Index, which is up 39%.
“Having said that, we note the stock has performed better than we had expected, given that the agricultural fundamentals are weak/mixed at best,” says Duignan. “It seems that investors want to look through 2010 and focus, instead, on the long term trends which admittedly look brighter.”
Duignan says a the JP Morgan and Deere & Co. hold differing views when it comes to ag fundamentals and markets during the next year.
For example, she says, “Deere expects U.S. farm cash receipts to recover in 2010, we are less bullish.”
The company expects U.S. farm cash receipts to be $309.3 billion in 2010 (vs. $298 billion estimated for 2009, and a peak of $334.0 billion in 2008).
“We expect cash receipts to be $297 billion in 2010 (vs. $296.6 estimated for 2009), given our less optimistic outlook for the livestock sector, and thus the expected decline in Grain Consuming Animal Units (GCAU's). As such, we expect North American equipment sales to remain weak in 2010.”
Duignan also cites he rapid and continued deterioration in European equipment sales as being a major hurdle for Deere to contend with in 2010.
The pace of the falloff has intensified last quarter, according to Duignan. “Central and Eastern European demand also remains very weak, as both financing and the fundamentals for local farmers remain under pressure.
“We noticed very aggressive financing terms for combines and large tractors at Agritechnica last week (0.49% for Deere combines; 0% financing for Case IH tractors). Additionally, according to the VDMA (German Agriculatural Equipment Assn.) Russia is considering even more stringent restrictions on foreign suppliers. As a result, we are not optimistic that an early recovery will occur in the region.”
Farm equipment makers will also have to contend with a difficult market in South America, though Duignan notes that fundamentals are improving, but a high level of concern for its currency is growing.
“No question that government financing has been supportive of equipment purchases, especially for small horsepower tractors. However, combines are still down year-over-year as crop farmers are still struggling with the weakening dollar and stronger Brazilian Real,” she says.
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