John Deere ( DE) may have fallen into one of the oldest traps in the business. Industry data for the U.S. tractor market this week suggest that Deere, of Moline, Ill., may be pushing too much product onto the dealerships that sell farm machines to the end user. If this is happening, it may mean past earnings have been artificially inflated and that future ones could sag below expectations. A recent Detox examined numbers that indicated the practice of overselling to dealers -- often called channel-stuffing -- is taking place. For a time, dealers might be willing to take the new inventory because Deere's finance arm, John Deere Capital, might be lending them money to buy the extra gear. Deere's representative didn't return a call seeking comment on the channel-stuffing theory. The stakes are high for the big tractor seller, whose richly priced stock suggests investors are expecting a strong performance in the coming year. Deere recently affirmed fiscal 2003 earnings guidance of $2.05 to $2.50 per share; analysts surveyed by Thomson Financial/First Call expect the company to make $2.43. Deere trades at 19 times that analyst consensus number, which is high for a manufacturer in an old industry. As a result, if channel-stuffing is taking place and 2003 earnings suffer as a result, Deere stock could tank. Deere fell 39 cents Thursday to $45.90.
The numbers that are currently creating a buzz are the industrywide U.S. sales and inventory numbers that are released monthly by the Association of Equipment Manufacturers. Because Deere has such a large share of the U.S. market, the monthly numbers are seen as quite representative of Deere's performance. Deere provides on its Web site a monthly sales commentary in which it compares its performance with that of the industry. But it doesn't give precise numbers, typically restricting its comments to whether it did better or worse than the AEM trends.