Ag Leads the Charge for Deere

For Rothbort's preview heading into the Deere conference call, please click here.

In a nutshell, Deere's (DE - commentary - Trade Now) agricultural business is strong while the forestry and construction businesses remain weak. The ag business was a bit better than expected, thus helping to push the company's results over analysts' consensus estimates.

Based upon the outlook provided, Deere is guiding to EPS of about $2.60 for 2009, which is below current consensus estimates of $3.08. I arrived at this by dividing the $1.1 billion net income guidance by approximately 425 million shares outstanding. It also appears that the company is lowering guidance on the sales line.

An initial jump in the stock price today was likely due to short covering on the back of better-than-expected results. Upon further review, the construction business weakness will continue to outweigh the marginal strength in ag while there are still some concerns in the credit portfolio. Furthermore, I contend that the company guided EPS and sales lower, albeit in an indirect manner. Not until we get indications of a return to construction spending would I recommend buying shares of Deere.

The company reported second-quarter net income of $472.3 million, or $1.11 per share, on net revenue of $6.748 billion. Revenue declined 17% year over year while EPS declined 36% year over year. Price realizations of 6% offset the adverse effect of foreign exchange rates, which cut into sales by 6%. Dealer inventories of tractors and combines rose as a percentage of sales vs. the prior year.

The company has combined its agricultural, commercial and consumer equipment divisions into a new agricultural and turf reporting structure. This will result in organizational cost savings of $50 million.

As for guidance, third-quarter net sales are expected to drop 26% year over year, with price gains offsetting foreign exchange losses once again. Full-year net sales are forecast to decline 19% year over year, and full-year net income is expected to be about $1.1 billion vs. prior forecast of about $1.5 billion, with more risk to the downside. Sales from the ag and turf businesses are expected to be slightly better to unchanged from previous forecasts for 2009, and construction and forestry sales are expected to now be down 42% vs. prior forecast of down 24%.

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At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.