Wednesday, May 14, 2008

Deere (DE) Earnings - Why I'm Avoiding Equipment Stocks

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On this week's earnings preview I wrote this in regards to Deere (DE):

Major ag equipment player Deere (DE) - I don't own the equipment stocks anymore; at some point the rising cost of steel, petrol products and the like will be hurting the bottom line unless they can pass all the costs along to farmers - over the next year if inflation does not abate this is the type of company who could see profit margins squeezed simply from the constant increase in input costs.

Here are the results - looks like a good call with the stock down 8%. Sometimes a rising tide (agriculture boom) does lift all boats. But sometimes you need to think farther ahead than that - as Wayne Gretzky says - don't be where the puck is, be where it's going to be. ("I skate to where the puck is going to be, not to where it has been.")
  • Deere & Co., the world's biggest maker of farm machinery, said Wednesday its second-quarter profit rose 22 percent, propelled by lofty crop prices that stoked global demand for its farm equipment despite a faltering U.S. economy.
  • But the Moline, Ill.-based company warned that rising costs of such raw materials as steel could cut into its earnings over coming months, sending its shares down 8 percent in morning trading. Deere also said it was seeing spot parts shortages "cropping up."
  • Deere said sales rose to $8.1 billion from $6.9 billion a year ago. The company said its sales outside North America soared 46 percent during the quarter, dwarfing the 6 percent jump of its sales in the U.S. and Canada. (sounds familiar)
  • But Mack told analysts that the cost of raw materials were "racing ahead well beyond what we anticipated," and shortages of various parts and components "are cropping up from time to time" despite suppliers' best efforts.
Remember, inflation is real - despite the governments best attempts to convince you otherwise. it WILL hit corporate profits - we are seeing it in FedEx (FDX), we are seeing it even in the best sectors and this is why, once the market stops drinking Kool Aid, it will have to recognize that corporate profits will be faltering everywhere - inflation is a tax on everything and everyone. This has been a consideration for me as I consider every company in the portfolio or new potential entrant - how much inflation will be eating away at it's future profits. And a large part of why I sold off Agco (AG) and CNH Global (CNH), 2 peers of Deere (DE) earlier in the year. Business is booming (on the top line - revenue) but costs are also booming. Avoiding blowups is as important as making money... rule #1 of making money = don't lose money.

No position


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