DE Preview: Bar Set Pretty High

For Deere (DE - commentary - Cramer's Take), it's all about farm income, and right now, the outlook is stupendous. Fiscal 2008 cash receipts should be up 22% over 2006 actuals -- thank you, surging commodity prices. That is an extra $60 billion in the hands of U.S. farmers, some of which will make its way into Deere's hands. Naturally, farmers worldwide will be cashing in on higher prices, so Deere's total global market is getting flush and is spending freely.

Analysts are looking for earnings of $1.75 per share on $7.6 billion in sales, but certainly, the whispers are for higher earnings, as Deere has blown away estimates for the last 18 months. The company's upside surprise history for the last six quarters is 6%, 21%, 20%, 12%, 32% and 25%, so the bar has been set pretty high.

Most U.S. farmers have locked in crop pricing for 2008 and 2009 via selling into the futures market, so budgets for capital expenditures are firm at least until mid-2009. Meanwhile, growth is rapid overseas, as Brazil and Eastern Europe both aggressively expand their arable acreage. Brazil is less than 10% of Deere's sales, but with the new Montenegro factory open since October, sales should ramp quickly. Naturally, Deere benefits greatly from the weak dollar, which is enhancing pricing, demand generation and translation effects.

On the call, however, analyst angst will be apparent, a typical reaction when your stock triples in a two-year period. Front of mind will be the backlash to U.S. ethanol policy, which is perceived as contributing to the massive food inflation now under way. As long as Iowa is the first caucus, not much will change, but Congress is thinking twice about the best use of corn.

Analysts will also fret about industrywide tractor sales during March, which were up a robust 16% year over year but feel slow after February's 67% gain. Analysts may also worry about the 7% increase in industry combine inventories, but they are actually down on a days-sales basis; row crop and 4-wheel-drive tractor inventories are both down on an absolute basis. Notably, Deere retail sales appear to be outpacing the overall industry growth.

The call starts at 10:00 a.m. EDT.

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At the time of publication, Dvorchak was long Deere, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.