Machinery Double Whammy: Industry Insight

BOSTON (TheStreet) -- Deere & Co.(DE Quote) released third-quarter results last week, beating analysts' estimates for revenue and earnings. But the agricultural-machinery maker's stock dropped because it said annual profits will almost halve.

Analysts predict similar declines for some of Deere's main competitors, such as Caterpillar(CAT Quote) and CNH Global(CNH Quote). As the economy has contracted, sales of agricultural and construction equipment have been hit hard. To make matters worse, machines such as farm balers and backhoe loaders are expensive, requiring customers to finance purchases in an era of tight credit.

Poor sales and lagging share prices make these companies unappealing during the downturn. Caterpillar and Deere have fallen about 34% over the past year, more than the benchmark S&P 500 index. So when's the right time to get back on the tractor?

Degree of Rivalry

Machinery companies compete on different levels. Equipment needs to be reliable, meet specifications and be competitively priced. In addition, the company must also offer attractive financing. As a result, there are many competition points, and rivals can swing in and steal business anytime.

Bargaining Power of the Customer

To their advantage, customers can negotiate terms or haggle over prices -- or do both. Also, much like car buyers, machinery clients can play deals off of competing companies. Larger customers will have more opportunity to strike a favorable deal. However, all deals will have a bit of wiggle room.

Bargaining Power of the Suppliers

Steel is one of the biggest costs for these massive machines. Much of which is American made. There has been recent debate over the "buy American" clause in the stimulus package, which requires companies to use U.S. steel. That has caused concern that other countries may enact a similar protectionist plan, which would torpedo sales at Caterpillar and Deere. Caterpillar gets 66% of its sales from overseas; at Deere, it's 39%.