Analysts are bullish on Moline-based machinery manufacturer Deere & Co. after it posted strong first-quarter profits following a weak 2009. Earnings per share came in triple the consensus estimate by Wall Street analysts.
Net income for 2009 ended Oct. 31 was down sharply from the previous year to $873.5 million from $2.05 billion, a 57 percent drop. Consensus earnings estimate is $3.23 compared with actual diluted earnings of $2.07 in 2009.
However, strong earnings in the first quarter ended Jan. 31, 57 cents per diluted share compared with the year-earlier 48 cents and a consensus estimate of 19 cents has buoyed the stock price steadily upward since early February. First quarter sales were down 7 percent to $4.24 billion compared with last year’s $4.56 billion, but net income rose 19 percent over a year earlier to $243.2 million from $203.9 million. The show-stopping earnings for the quarter were driven not by demand, but margin improvement attributed to lower raw materials cost, less price cutting and improved foreign currency exchange rates.
Despite the dip in sales, analysts are expecting Deere to have a strong 2010. Its agriculture machinery business is anticipated to benefit from strong farm cash receipts and high commodity prices, which may potentially offset continued slow sales in its construction equipment division.
“We expect that when demand recovers in 2010 and beyond, one of the few levers farmers will have to enable higher yields will be reinvestment in farm equipment,” wrote Jeffries & Co. Inc. analyst Stephen Volkmann in a March report.
Deere revised its 2010 net income forecast to $1.2 billion, flat compared with last year but up from the $900 million forecast in January. The sales forecast for the agriculture division, Deere’s core business, was increased to between 4 percent and 6 percent over last year, up from its January forecast of a 4 percent decrease.
“A year ago I would’ve told you sales would be down. Six months ago I would’ve told you they would be flat. Today, sales for North America will be up,” said Gabelli & Company Inc. analyst Heiko Ihle. “The numbers are getting better. Overall, commodity prices are coming up." The Standard & Poor's index of agriculture futures has risen 4 percent since the beginning of this month.
This rise, Ihle went on, is the reason that Deere stock keeps creeping up. “Overall, the way to look at these things, excluding market factors, is: Can the farmer afford new equipment? In my opinion, they can.”
In the past 12 months, Deere stock has been as low as $34.90 and as high as $62.73, and is currently trading towards the high end at $61. With a price-earnings ratio of 28.29, Deere is more expensive than the Standard & Poor’s 500 Stocks average of 20.92, but nevertheless it's been trending upwards since March of last year.
Experts say that the farm machinery industry will benefit from strong commodity prices, which puts money in the bank for farmers who in turn will invest in equipment. North American sales of row crop tractors increased 5.2 percent and four-wheel drive tractors rose 41.7 percent over the previous year in fiscally-important March, according to a report issued by the Association of Equipment Manufacturers.
“We believe farm markets are weathering the economic storm relatively better than many other industrial sub sectors, and that tight supply/demand indicates that crop prices and farmer income could rebound quickly,” Volkmann of Jeffries & Co. wrote in a research note.
Analysts' comments for the rest of the year are generally optimistic, hinging on an overall lift expected in the agricultural machinery sector.
Ihle increased his annual earnings estimate to $3.10 and maintained his “buy” rating on its stock, rating Deere “an attractive way” to ride increases in global food demand.
Volkmann brought up his 2010 earnings estimate to $3.20 based on margin and revenue results well above expectation, above the company’s guidance of $2.83. Volkmann reiterated his “buy” rating and increased his price target to $65, indicating in his research note that the farm industry is on the verge of an equipment reinvestment cycle. Based on historic data, Deere stock on the upswing of a reinvestment upturn could be in the $85-$90 range, he wrote.
“We are fairly bullish on the sector. We believe that the world needs to reinvest in its farming structure,” he stated.
Robert W. Baird & Co. Inc. analyst Robert McCarthy raised his target price to $64 from $53. His increased earnings estimate was a more cautious $2.95, citing the “pre-buying” risk effect on 2011, where customers purchase in 2010 to avoid stricter and more costly diesel emission standards required in 2011 models, advancing 2011 demand into the previous year. McCarthy expressed concern that the agricultural machinery cycle may have already peaked, but remained optimistic in light of Deere's stronger-than-expected first-quarter demand. Risk and reward seem balanced, he wrote in a research note.
Sterne, Agee & Leach Inc. analyst Lawrence De Maria increased his stock price target to $66 from $52 and upgraded his rating to “buy,” staying supportive of a strong recovery with a revised 2010 earnings estimate of $3.30, up from $2.25. De Maria believes that risks are outweighed by upsides: agriculture trends strengthening, growth in Brazil and an anticipated recovery in construction activity.