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.
Access Investor Kit for AGCO Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0010841023
Access Investor Kit for Caterpillar, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US1491231015
Access Investor Kit for Deere & Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2441991054
Subscribe to WSJ: http://online.wsj.com?mod=djnwires