Commodities & Metals

New Uncertainty in Farm Equipment Sales (DE, CNH, AGCO, CAT, CF, POT, DBA, MOO)

Farm equipment maker Deere & Co. (NYSE: DE) reported fiscal third quarter EPS of $1.69 this morning, just $0.02 better than analysts’ consensus estimate. Revenue totaled $8.37 billion, significantly better than expectations of $7.5 billion. High crop prices have been driving equipment sales for several quarters now, but rising costs for steel, rubber, and other raw materials are beginning to weigh on the stock.

CNH Global N.V. (NYSE: CNH) reported quarterly earnings a couple of weeks ago and easily topped expectations. AGCO Corp. (NYSE: AGCO) also posted sterling results for its second quarter. Caterpillar Corp. (NYSE: CAT) reported very solid numbers in July — and the stock fell. That’s happening to Deere today as well. All four are down year-to-date.

Because earnings and revenues have been robust on the strength of demand for agricultural and other heavy equipment, it could be that investors have set expectations too high. Nothing less than spectacular will do.

Or it could be that the stocks are fairly valued now and were overbought before. Caterpillar’s forward multiple is 9.63, CNH’s is 8.11, AGCO’s is 8.66, and, based on today’s earnings report, Deere’s is slightly more than 11. Those numbers seem a little low.

What could be going on is that despite the these companies’ own forecasts for continue sales and profits, investors are more concerned with the cost side of things. Deere’s operating margin in its agricultural machinery division fell from nearly 39% in the same period last year to 33% this quarter. Rising raw materials costs are a legitimate concern, especially if other factors could begin to influence sales.

For example, Deere has projected lower sales in South America this year, an area where the company has been very strong. The company forecasts North American sales up 5%-10% on the year, but a report from an agricultural trade group notes that sales of tractors in the US are down slightly year-to-date, and were down -7.4% in the month of July.

Predictions for lower corn yields and a lower-than-expected harvest could also be adding pressure to farm equipment purchases. Even the increased availability of wheat on international markets due to Russia’s decision to resume exports could be stifling sales somewhat.

Fertilizer stocks are performing somewhat better overall due primarily to the fact that adding more fertilizer to increase yields is cheaper and more effective than buying new equipment. Shares of CF Industries Holdings Inc. (NYSE: CF) have gained about 25% year-to-date, and shares in Potash Corp. of Saskatchewan are up about 8% in the same period.

Deere’s shares are down about -1% just after noon today, at $74.44, in a 52-week range of $60.45-$99.80. Volume has already surpassed the daily average. Caterpillar stock is down about -1.35%, at $88.14, in a 52-week range of $63.34-$116.55. Shares of CNH are down more than -2%, at $30.58, in a 52-week range of $27.01-$54.45, and AGCO shares are down more than -3%, at $39.23, in a 52-week range of $32.36-$59.81.

Shares of PowerShares Agriculture Fund are up about 0.7%, at $33.09, in a 52-week range of $25.63-$35.58. The Market Vectors Agribusiness ETF (NYSE: MOO) is up about 0.25%, at $50.15, in a 52-week range of $42.35-$57.93.

Paul Ausick