Crops' Course Puts Deere in Headlights -- Ahead of the Tape

By Spencer Jakab 

After trailing last year, CAT is now outpacing Deere handily.

Rather than some cross-species animal race, this speaks to the state of the heavy-equipment industry and the recent travails of Deere & Co. With agricultural equipment responsible for nearly four-fifths of its revenue, the maker of the iconic green and yellow machines is being squeezed by falling crop prices. In the U.S., still its biggest market, farm incomes are seen dropping by 21% in 2014, according to the latest update by the Agriculture Department. And farm production expenses are seen rising by nearly 6%.

That state of affairs has helped Caterpillar Inc., which got slammed by China's construction slowdown last year, outperform Deere recently. Shares in the company known to customers as CAT are up by 26% in the past year, or about 23 percentage points more than Deere. Bringing up the rear is even more agriculture-dependent AGCO Corp., down by over 22% in the past year.

But Deere's fiscal-year results, due out just before the holiday break, should leave investors thankful that things aren't any worse. Management lowered the bar considerably when reporting fiscal third-quarter results in August. Revenue guidance for the full year was lowered: It is now seen shrinking by 6%, not 4%. Deere lowered earnings guidance, too, but not as much as feared.

After a couple of nasty shocks in fiscal 2012, Deere has exceeded analyst forecasts by a wide margin for seven quarters in a row. For the fiscal fourth quarter through October, analysts polled by FactSet see it reporting earnings per share of $1.57, down from $2.11 a year earlier.

Unfortunately, analysts also see earnings dropping in fiscal 2015 and again in 2016. If that year turns out to be the trough of the agricultural-equipment cycle, then the stock doesn't look expensive: it fetches less than 15 times 2016 earnings. Anticipating that, the shares trade at less than 10 times trailing 12-month earnings versus around 14.5 times on average over the past decade.

Like construction, the agricultural-equipment market is reliably and sometimes brutally cyclical. Deere hasn't hesitated to adjust its output and overhead correspondingly. Based on how it has weathered prior downturns, relative weakness in Deere's stock presents a good opportunity for investors today.

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