Farm equipment maker Deere (DE) reports earnings on Friday. The stock bottomed last August and is just five points from a 10-year high. Investors have looked through the current equipment cycle and are buying the stock anticipating better times. Judging from the last earnings call, investors many have to wait a long time.
Just after Thanksgiving, Deere reported a strong fourth quarter, but management turned around and told investors fiscal 2015 would be substantially below expectations. The company cut guidance so much that many investors felt management had baked-in all the bad news for the year.
Investors have been buying the stock ever since. Net income for 2015 was projected to come in 14% below the consensus estimate of $2.2 billion. The company told investors to expect a 20% decline in the agriculture business.
Sales of farm equipment have been declining because of poor economic conditions around the world and due to a strong dollar. Exports have been especially hard hit to emerging parts of the world, like Brazil. Many equipment analysts have been forecasting a 10% decline in worldwide sales of combines, Deere's most profitable line of equipment.
Other lines of businesses, like construction and forestry, haven't been hit as hard. Unlike Caterpillar (CAT), most of Deere's construction business is based in the United States and has been insulated from the decline in the mining business and the economic downturn in China.
Investors now expect revenue to decline 14% in fiscal year 2015 and fall about 2% next year. Because Deere's fiscal year ends in October, we are just a eight short months away from a better environment. If the analysts are right, by summer Deere should be facing a series of easier comparisons -- therefore, the "the bad news is baked-in" thesis.
But other analysts think the cycle peeked in fiscal 2013, after a rebound in corn prices set off an equipment-buying frenzy. In 2013, the company produced revenue of $37.7 billion. These analysts look at projected revenues of $28.5 billion in fiscal 2015 and $27.9 billion in fiscal 2016 and scratch their heads as to why the stock can be near a 10- year high.
The consensus now is looking for earnings of $0.82 (vs. $1.81 last year) and revenue of $5.5 billion. Value investors like Warren Buffett think the worst is over and have been buying the stock. It was reported just Wednesday that Buffett bought 3.9 million shares in the second quarter.
I believe the stock will continue to trade in a range between $85 and $90 until there is some clarity regarding the demand for farm equipment. Or until we get come indication that corn prices are going higher.
I would stay on the sidelines and avoid Deere right now.