Deere Benefits From Strong Farming

By Sham Gad | November 23, 2010 AAA

Deere & Co (NYSE:DE), the world's largest manufacturer of farm equipment, continued to benefit from a favorable farming environment spurred by strengthening agricultural prices. For the company's fiscal 2010 third quarter, Deere reported net income of $1.07 a share, sharply up from 53 cents in the year-ago period. Average analyst estimates were looking for 97 cents a share. More importantly, the profit figures came on top of a 35% lift in sales to $7.2 billion for the quarter.

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A Happy Farmer
The past few months have seen surging agricultural prices that are nearing levels not seen since 2008. Cotton, corn and wheat have all risen in price during the second half of 2010. That price strength gives farmers confidence to plant more acres, which stimulates demand for Deere's green and yellow tractors, combines and other farming essentials. Deere's results for 2010 reflect that confidence in the farming industry. Shares are up over 40% year to date, and are significantly outperforming the indexes. (For more, see 5 Agriculture Stocks To Growth With.)

Unfortunately, the company's 2011 forecast did not please the market. Deere forecasted fiscal 2011 net income of $2.1 billion against estimates of $2.3 billion. Shares did not respond favorably to the news.

Franchise Power
After a strong share price run up in 2010, it's unlikely Deere will repeat the performance in 2011. Markets are forward looking and they have clearly favored Deere shares in 2010 in response to a strong agricultural environment. Trading at 27-times earnings, Deere joins other high quality names, such as Caterpillar (NYSE:CAT), that have been on a tear this year thanks to strong demand from China and other developing markets. Both companies have strong franchise models that has led to a strong earnings rebound in 2010. Even small cap Tractor Supply (Nasdaq:TSCO), which operates retail stores that cater to the farming lifestyle, have seen a steady climb up.

Other quality names like Archer Daniels Midland (NYSE:ADM), which trades at 10 times earnings and yields 2%, could reap the benefits of continued strength in the agricultural space.

A Healthy Year
Deere's dominance in farming equipment sales and service should benefit the company well in 2011. Despite a forecast below estimates, Deere's numbers could prove to be conservative. After an amazing run in 2010, investors may wish to lower expectations in 2011. (For more, see Fundamental Analysis: Introduction) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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