Wednesday, February 16, 2011

Deere (DE) Continues to Benefit from Agricultural Bull Market

Agricultural equipment bellweather Deere (DE) posted earnings this morning of $1.20 versus the expectation of $0.99 as the secular bull market in this sector continues.  (Full report here) The stock is up some 50% since the QE2 rally began in Jackson Hole, Wyoming and currently sports a quite rich adjusted* forward PE of 16.5x the year end estimate of fiscal 2011 (October 2011).

*$5.49 estimate + $0.21 beat from this quarter added to create $5.70.

We'll have to see continued substantial beats to keep the valuation anywhere near historical norms, if the stock continues its 'bulletproof' rally.  Indeed, the chart of Deere is almost a carbon copy of the S&P 500 the past half year, except it has advanced at an accelerated pace.

One area of concern go forward is commodity inflation - especially steel and plastics - which served to hurt margins in 2008. [May 14, 2008: Deere Earnings - Why I'm Avoiding Equipment Stocks]  Thus far price increases to alleviate such issues have been muted - about 2%.  An area to keep an eye out on.

That said, since our multinationals have yet to figure out how to outsource Nebraska, Iowa (or indeed Saskatchewan) this is one of those rare stories where North American growth is surpassing Asian growth.
  • Equipment net sales in the United States and Canada increased 35 percent for the quarter. Outside the U.S. and Canada, net sales were up 22 percent for the quarter, with an unfavorable currency-translation effect of 1 percent.

Via Reuters:

  • Farm equipment maker Deere & Co reported a doubling of quarterly profit on Wednesday amid strong North American sales of large, high-margin machines and price increases, and lifted its full-year profit forecast.
  • The world's largest maker of tractors and combines earned $513 million, or $1.20 per share, in the first quarter that ended Jan. 31, compared with $243.2 million, or 57 cents per share a year earlier.Deere said it expected a full-year profit of $2.5 billion. Its November forecast called for a 2011 profit of $2.1 billion.  
  • Revenue rose 27 percent to $6.12 billion, ahead of Wall Street forecasts for sales of $5.67 billion. 
  • Sales of large farm machinery, particularly in the United States and Canada, are continuing to make a major impact, while construction equipment shipments are experiencing some degree of recovery, Allen noted. "Our record first-quarter performance is especially gratifying in light of market conditions that remain below normal levels in certain key sectors."

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