Little Reason to Cheer for Deere -- Ahead of the Tape

By Steven Russolillo 

"Build it and they will come" only works in the movies. Real farmers are passing on Deere & Co.'s green-and-yellow machines. The situation is likely to get worse before it gets better.

Low commodities prices have hampered the agricultural equipment industry as a whole. And for Deere, which three months ago cut its revenue and profit views for 2016, there is little reason to think much will have changed when it reports its fiscal second-quarter results on Friday.

Granted, Deere has a pretty low bar to clear. Analysts polled by FactSet estimate earnings for the period ending in April of $1.48 a share, down 27% from a year ago. This was expected to be $1.61 at the end of October. Meanwhile, revenue is expected to have dropped 10% to $6.7 billion.

But even slightly beating those estimates won't mask Deere's underlying difficulties. Analysts at J.P. Morgan estimate Deere's dealers are still working through more than a year's worth of excess used equipment. That could make them hesitant to take in more used tractors as trade-ins for new models.

The bank estimates it could take the industry "several years" before it returns to a more normal demand environment. In February, Deere said equipment sales would likely fall 10% in 2016, worse than initially anticipated.

One of the lone bright spots for Deere of late has been its stock price. Shares are up more than 7% this year, far outpacing the S&P 500.

That comes after the shares shed one-quarter of their value from their August peak through their January trough. This pales in comparison to the pattern during the financial crisis when Deere fell by roughly 75%, or in 2011 when it fell by about 40%.

Yet a longer time frame tells a different story. Amid big swings, the stock is essentially unchanged over the past five years. Without much chance for near-term relief, and fetching more than 20 times projected earnings over the next 12 months, this stock looks too rich for the current environment.

Those assuming Deere's rally will continue should consider going against the grain.

(END) Dow Jones Newswires

May 19, 2016 14:41 ET (18:41 GMT)

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