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Deere Keeps On Running
Investors looking at the results from machinery and component companies like Caterpillar (NYSE:CAT), Cummins (NYSE:CMI) or Deere (NYSE:DE) may think there's a bottomless demand for heavy-duty equipment these days. To be sure, strong agricultural markets are encouraging farmers to spend on equipment, while a torrid pace of construction in the developing world is likewise gobbling up machinery almost as fast as its manufactured. Deere is just as cyclical as it has always been, but investors optimistic on ongoing global growth may yet have more to reap here. (To know more about cyclical stocks, read: Cyclical Versus Non-Cyclical Stocks.)
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A Powerful End to a Successful Year
Deere reported 20% revenue growth for its fiscal fourth quarter, as modest price increases coupled with double-digit tonnage growth drove a successful result. Sales in the large agriculture and turf business were up 18%, while the construction business saw 34% growth on 37% tonnage growth. Although growth outside the U.S. and Canada was much stronger (27% in constant currency), homegrown growth of 14% was hardly poor.
Although Deere, like everyone, is paying more for input costs like steel and energy, the overall profitability for the quarter was quite good. Gross margin slid about a half-point, but operating income rose 28% as corporate expenses were kept under good control. Equipment margins jumped more than a point, as 31% operating profit growth in the agriculture and turf business was complimented by 61% growth in the construction and forestry segment. (To know more about income statement, read: Understanding The Income Statement.)
Farmers Feeling Good
For all of the talk about tough credit in the U.S. and the meltdown in Europe, farmers still seem to be pretty willing to shell out for new equipment - perhaps not so surprising given the strong price of many agricultural commodities. A recent farm equipment show in Europe seemed pretty optimistic, and Deere is forecasting even better growth in 2012 than rivals CNH Global NV (NYSE:CNH) and Agco (NYSE:AGCO).
The developing world continues to be a big opportunity for Deere. Farmers are increasingly looking to mechanize and automate, and crop prices are underpinning these investments. Moreover, given the news from Latin American agricultural companies like Cresud (Nasdaq:CRESY), Cosan (NYSE:CZZ) and Adecoagro SA (NYSE:AGRO), there seems to be quite a lot of momentum for putting more acres under cultivation and upgrading the equipment base.
More and More a Developing Story
Even though Deere does not have the mining business that Caterpillar has, developing markets are every bit as much a key part of the Deere story. Countries like Brazil and India continue to build at breathtaking rates and that is fueling demand for all manners of heavy-duty equipment, engines and components - boosting companies like Eaton and Illinois Tool Works (NYSE:ITW) alongside primary equipment makers.
The biggest question is whether this growth is sustainable. The thing about building booms is that they often end suddenly, and badly. China has been trying to apply the brakes to its economic growth and other countries like Brazil, India and Indonesia are not immune to the global economy. In other words, these are fat times for Caterpillar, Deere and Komatsu (OTCBB:KMTUY), but investors need only look at the recent history of Dubai to see how quickly circumstances can change.
The Bottom Line
Deere is not very cheap by the standards of average full-cycle multiples. Then again, with growth exceeding expectations and management guidance as strong as it is, it doesn't seem entirely unreasonable that the stock would be trading at a premium. Deere remains a good way to play emerging market growth and healthy trends in agriculture, but even granting that this could be a long-term "super-cycle," odds say that business is closer to a pause than another acceleration.
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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
A Powerful End to a Successful Year
Deere reported 20% revenue growth for its fiscal fourth quarter, as modest price increases coupled with double-digit tonnage growth drove a successful result. Sales in the large agriculture and turf business were up 18%, while the construction business saw 34% growth on 37% tonnage growth. Although growth outside the U.S. and Canada was much stronger (27% in constant currency), homegrown growth of 14% was hardly poor.
Although Deere, like everyone, is paying more for input costs like steel and energy, the overall profitability for the quarter was quite good. Gross margin slid about a half-point, but operating income rose 28% as corporate expenses were kept under good control. Equipment margins jumped more than a point, as 31% operating profit growth in the agriculture and turf business was complimented by 61% growth in the construction and forestry segment. (To know more about income statement, read: Understanding The Income Statement.)
Farmers Feeling Good
For all of the talk about tough credit in the U.S. and the meltdown in Europe, farmers still seem to be pretty willing to shell out for new equipment - perhaps not so surprising given the strong price of many agricultural commodities. A recent farm equipment show in Europe seemed pretty optimistic, and Deere is forecasting even better growth in 2012 than rivals CNH Global NV (NYSE:CNH) and Agco (NYSE:AGCO).
More and More a Developing Story
Even though Deere does not have the mining business that Caterpillar has, developing markets are every bit as much a key part of the Deere story. Countries like Brazil and India continue to build at breathtaking rates and that is fueling demand for all manners of heavy-duty equipment, engines and components - boosting companies like Eaton and Illinois Tool Works (NYSE:ITW) alongside primary equipment makers.
The biggest question is whether this growth is sustainable. The thing about building booms is that they often end suddenly, and badly. China has been trying to apply the brakes to its economic growth and other countries like Brazil, India and Indonesia are not immune to the global economy. In other words, these are fat times for Caterpillar, Deere and Komatsu (OTCBB:KMTUY), but investors need only look at the recent history of Dubai to see how quickly circumstances can change.
The Bottom Line
Deere is not very cheap by the standards of average full-cycle multiples. Then again, with growth exceeding expectations and management guidance as strong as it is, it doesn't seem entirely unreasonable that the stock would be trading at a premium. Deere remains a good way to play emerging market growth and healthy trends in agriculture, but even granting that this could be a long-term "super-cycle," odds say that business is closer to a pause than another acceleration.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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