Ahead of the Tape: Deere Investors Can Expect Lean Harvest -- WSJ
19 August 2016 - 5:02PM
Dow Jones News
By Steven Russolillo
Farm-equipment makers can't catch a break.
Lower prices for corn, soybeans and other commodities have
squeezed farmers' incomes across the globe, prompting them to cut
back significantly on equipment spending. That has upended
companies such as Deere & Co., the world's largest seller of
tractors and harvesting combines. Its sales and profits have
dropped for nine consecutive quarters.
Hoping for a bottom since this slump began in 2014 hasn't been a
wise strategy. The maker of the iconic green-and-yellow farm
machines already has cut its full-year outlook twice so far this
year. Unfortunately, more pain is likely in store when it reports
fiscal third-quarter results Friday.
Analysts, who have significantly ratcheted down their estimates
for Deere, now expect earnings of 94 cents a share, down 38% from a
year ago. Revenue for the period ending in July is estimated to
have declined by 11% to $6.1 billion.
Falling incomes have prompted many farmers to cut their
investment spending. And now, many of Deere's customers prefer to
lease machinery rather than purchase it.
The problem is that much of Deere's equipment has significantly
depreciated in value. The company took a write-down earlier this
year on the residual value of its used equipment. As customers have
been more prone to walk away when their leases expire, Deere has
been working to restructure more leases.
Efforts to manage this overcapacity will likely play a prominent
role in the next move for Deere's volatile stock. Shares are
essentially unchanged for the year but are down more than 20% from
last summer's peak.
Deere typically hasn't fared well after earnings reports,
either. Its stock has dropped following 16 of its past 21 quarterly
reports dating back to 2011.
And if history is a guide, the worst might not be over for
Deere's share price. In the financial crisis, Deere lost about
three-quarters of its market value. And in 2011, the stock dropped
about 40% peak to trough.
Currently fetching about 21 times projected earnings over the
next 12 months, the stock's multiple is among its highest levels
over the past five years.
This stock's drought isn't over just yet.
(END) Dow Jones Newswires
August 19, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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