Commodities & Metals

Farm, Construction Machinery Remains Solid

Deere & Co. (NYSE: DE) reported fiscal second-quarter results this morning that topped estimates by a solid margin. The farm and construction equipment maker posted EPS of $2.61 on revenue of $10 billion. The consensus estimates called for EPS of $2.53 and revenue of $9.72 billion.

Like smaller competitors AGCO Corp. (NYSE: AGCO) and CNH Global NV (NYSE: CNH), Deere’s farm equipment sales in the US and Canada rose the most as acres under cultivation continue to grow. Sales in Asia were described as “up moderately, though slowing.” The largest of the equipment makers, Caterpillar Inc. (NYSE: CAT), has much more invested in Asia, particularly China, than does any of the others, and it was that commitment to China that haunted Caterpillar when it announced quarterly results last month. More about that later.

For the current quarter, Deere expects sales to rise 25% above the same period a year ago. Prices are expected to improve by about 4%, and currency effects are expected to reduce sales by about 4%. For the fiscal year, Deere forecast sales growth of about 15%, with a 4% improvement in prices and a -3% currency exchange impact. The company also raised its total net income forecast from $3.275 billion to $3.35 billion for the year.

Deere, unlike Caterpillar, does not have significant exposure in China. Caterpillar employs 11,000 people in the country and expects that number to double by 2015. The company pointed out that just 3% of its global revenues in the first quarter were attributable to China. Although the two statements may not be linked in management’s mind, they are in investors’ minds.

When Cat had to downplay China’s role in its business, what investors took away is that business was falling in China. And the new plants and new employees in Caterpillar’s Chinese operations are now going to be a drag on earnings, not a positive. That probably won’t turn out to be the case, but that was the effect of what the company had to say.

None of these four has had a particularly good past 12 months. As of last night’s close, every one’s share price is lower than it was a year ago, with AGCO down -19%, Deere and Caterpillar down -13%, and CNH down just less than -1%. Growth in North America is not going to drive record sales, only Asia can do that. As long as the Chinese economy continues its slowed growth, sales of farm and construction equipment won’t jump off the charts.

Shares of Deere are up about 1% in the pre-market, at $77.35, in a 52-week range of $59.92-$89.70.

Paul Ausick