Can Deere Survive the Agricultural Recession?

During the last three years, the farming industry has been challenged by one of the roughest agricultural downturns since the Great Depression. For farmers, high levels of debt in comparison to income, surpluses of crops, and dropping farmland values have put tremendous pressures on their business.

And in turn, that's hurt the companies that support the agricultural industry.

But while many farm machinery makers have bottomed out during this agricultural recession, Deere  (DE) has managed to survive and even thrive.

Year to date, Deere's stock is up 21%. On Wednesday the company is scheduled to report its fiscal fourth-quarter and full-year earnings. Should investors prepare for more gains?

Granted, given the recessionary environment in the sector, the picture is not entirely rosy. But analysts are already expecting that.

On average, analysts predict that adjusted earnings per share will come in at 40 cents, down from $1.08 in the year-earlier quarter.

Analysts had forecast adjusted EPS of 94 cents a share in the third quarter, but the company blew past expectations with a $1.55 per share performance. Revenue, however, missed expectations.

The company expects net income for fiscal 2016 to come in at around $1.35 billion (vs. $1.94 billion in fiscal 2015). That number, if delivered, would be the lowest since 2009.

Deere projects full-year 2016 equipment sales to see a downswing of about 10%, with a decrease of around 8% for the fourth quarter, compared with the year-ago period.

Investors can expect further cost-reduction initiatives, a retail demand outlook, and updates on the savings program, apart from 2017 projections.

Two of Deere's biggest rivals have been showing signs of improvement.

Only days ago, Caterpillar (CAT) reported a 12% year-over-year drop in worldwide retail machine sales for the rolling three-month period ending in October. This, however, is an improvement over the 18% decline reported for the three-month period ending in September and the 17% decline for the period ending in August.

And in October, AGCO (AGCO) showed weakness in its third-quarter results, with North American sales declining by 8.5%. However, it beat Wall Street's EPS and revenue estimates.

If Deere follows suit and delivers a softer-than-expected blow on sales, investors could see a beat on consensus revenue expectations.

And Deere might start seeing sales grow in other parts of the world as well. There are signs of emerging demand beyond the U.S. as pricing of North American large agricultural equipment has reverted to multidecade lows.

While Deere isn't anywhere near an earnings-cycle recovery (like its peak in 2012-2013), the company could benefit from cost savings initiatives (it had set a $500-million target).

Citigroup, while hiking its full-year 2016 and 2017 estimates for Deere, had considered plans for more structural cost reductions. And Morgan Stanley analysts have said the stock fully reflects the $500 million savings by fiscal year 2018.

There are currently seven analysts with bullish calls, eight with hold ratings and eight with sell ratings on the stock.

While Deere may well be a great long-term investment, the jury is divided on whether right now is a great time to buy the stock. A combination of maturing leases and possible interest rate hikes make investing in Deere risky right now.

If the company can manage its inventory challenges, falling sales and ongoing low crop prices, Deere could finally emerge victorious.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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