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Deere Rolls To Big Gains
Deere & Company (NYSE:DE) rolled to big gains in its fiscal second quarter, as sales of equipment soared for a record-setting performance. Demand for its equipment lines was strong on a global basis, as large farm machinery led the company's results.
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Harvesting the Quarter
The demand for its equipment propelled Deere to a tremendous quarter. Net income rose from $547.5 million, or $1.28 per share in last year's second quarter, to $904.3 million, or $2.12 per share in this year's. Last year's quarter was affected by a healthcare related tax charge of 30 cents per share. Based on non-GAAP measures, net income would have been $677 million, and EPS $1.58. The profits in this year's quarter still represent huge gains for Deere. Sales increased from $7.131 billion in the same quarter last year to $8.91 billion in this year's. The U.S., Canada and Brazil led the way.
The Market's Take
By midday after the earnings report, the market had taken down Deere shares $1.63 a share, or 1.9%. Although Deere beat estimates of $2.06 a share and raised guidance, analysts pointed out that there are high expectations currently in the market for industrial stocks, so the quarter was considered only adequate, if that. A couple of potential concerns caught the eye of investors: raw material and other inputs costs rose significantly.
Agricultural Landscape
Farm machinery, which accounts for so much of Deere's sales, drove the company's earnings in the quarter. The continuing agricultural boom has created this demand and pushed Deere's performance. Although the construction industry contributed to Deere's performance, it isn't Deere's bread-and-butter, as it is Caterpillar's (NYSE:CAT), for example.
Despite the pullback in the commodities market, which began this month, the long-term prospects for the farming industry look strong. Farms and farmers are doing well, and the future for agriculture worldwide indicates widespread growth. Smaller Deere competitor Agco (NYSE:AGCO) has also been thriving, while other larger ag stocks, such as seed giant Monsanto (NYSE:MON) as well as fertilizer companies like CF Industries (NYSE:CF), are still expected to continue to flourish in the near-term.
Deere's Outlook
Equipment sales are expected to rise roughly 20% for both the upcoming quarter and the rest of fiscal 2011. Net income for the year is projected at $2.65 billion. This includes factoring in favorable foreign currency exchange, as well as the negative impact of the aftereffects of the Japanese earthquake and tsunami. Despite a lot of rain in the U.S., which has slowed the spring planting season in some regions, Deere still sees a lot of worldwide demand for crops, with stockpiles low. Corn prices, for example, have doubled since last summer, and even with the pullback, remain at $7 a bushel. Even post-pullback, commodity prices are likely to remain high.
The Bottom Line
Deere traded recently at $86.60 a share, roughly 13% off its 52-week high, with a P/E just under 15. The company has solid long-term growth prospects. Still, long-term fundamental investors might want to wait a little on this stock to see if there's any further pullback, then it will be a terrific opportunity. (These five performance ratios will help you measure how good your money manager is at increasing the value of your portfolio. Check out 5 Ways To Rate Your Portfolio Manager.)
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TUTORIAL: IPO Basics
Harvesting the Quarter
The demand for its equipment propelled Deere to a tremendous quarter. Net income rose from $547.5 million, or $1.28 per share in last year's second quarter, to $904.3 million, or $2.12 per share in this year's. Last year's quarter was affected by a healthcare related tax charge of 30 cents per share. Based on non-GAAP measures, net income would have been $677 million, and EPS $1.58. The profits in this year's quarter still represent huge gains for Deere. Sales increased from $7.131 billion in the same quarter last year to $8.91 billion in this year's. The U.S., Canada and Brazil led the way.
The Market's Take
By midday after the earnings report, the market had taken down Deere shares $1.63 a share, or 1.9%. Although Deere beat estimates of $2.06 a share and raised guidance, analysts pointed out that there are high expectations currently in the market for industrial stocks, so the quarter was considered only adequate, if that. A couple of potential concerns caught the eye of investors: raw material and other inputs costs rose significantly.
Farm machinery, which accounts for so much of Deere's sales, drove the company's earnings in the quarter. The continuing agricultural boom has created this demand and pushed Deere's performance. Although the construction industry contributed to Deere's performance, it isn't Deere's bread-and-butter, as it is Caterpillar's (NYSE:CAT), for example.
Despite the pullback in the commodities market, which began this month, the long-term prospects for the farming industry look strong. Farms and farmers are doing well, and the future for agriculture worldwide indicates widespread growth. Smaller Deere competitor Agco (NYSE:AGCO) has also been thriving, while other larger ag stocks, such as seed giant Monsanto (NYSE:MON) as well as fertilizer companies like CF Industries (NYSE:CF), are still expected to continue to flourish in the near-term.
Deere's Outlook
Equipment sales are expected to rise roughly 20% for both the upcoming quarter and the rest of fiscal 2011. Net income for the year is projected at $2.65 billion. This includes factoring in favorable foreign currency exchange, as well as the negative impact of the aftereffects of the Japanese earthquake and tsunami. Despite a lot of rain in the U.S., which has slowed the spring planting season in some regions, Deere still sees a lot of worldwide demand for crops, with stockpiles low. Corn prices, for example, have doubled since last summer, and even with the pullback, remain at $7 a bushel. Even post-pullback, commodity prices are likely to remain high.
The Bottom Line
Deere traded recently at $86.60 a share, roughly 13% off its 52-week high, with a P/E just under 15. The company has solid long-term growth prospects. Still, long-term fundamental investors might want to wait a little on this stock to see if there's any further pullback, then it will be a terrific opportunity. (These five performance ratios will help you measure how good your money manager is at increasing the value of your portfolio. Check out 5 Ways To Rate Your Portfolio Manager.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Greg Sushinsky
Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.
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