Investors No Longer Bet the Farm on Deere; Results Should Shed More Light on Fears That Soft Commodities Are Slipping Like Hard Ones, Threatening Customers’ Incomes
August 14, 2013 Leave a comment
August 13, 2013, 4:04 p.m. ET
Investors No Longer Bet the Farm on Deere
Wednesday’s Results Should Shed More Light on Fears That Soft Commodities Are Slipping Like Hard Ones, Threatening Customers’ Incomes
Investors have been echoing Eddie Albert, who crooned that “Green Acres is the place for me.” Even after slipping recently, tractor maker Deere DE +0.64% & Co. has had a great decade. Its share price has plowed over not just the S&P 500, by 166 percentage points, but even fellow U.S. machinery giant Caterpillar Inc., CAT +0.29% by 74 points. That company also rode rising commodity prices and wealth in the developing world. But it did so through exposure to construction machinery and mineral resources—weak spots lately as China’s economy slows.
Now, though, there are fears that soft commodities such as corn, wheat and lumber are slipping like hard ones, threatening the incomes of Deere’s customers. Fiscal third-quarter results Wednesday for the period through July should shed more light on that.
But some investors have pre-empted any possible bad news by selling. Deere’s stock has lagged behind the broad market by nearly 13 percentage points over the past three months. This has happened even though analysts’ forecasts have slipped by only about two cents, to $2.17 a share, versus $1.98 in the same period a year ago.
Since 2006, Deere’s trailing, 12-month operating earnings have grown at a compound annual rate of 20%, nearly three times Caterpillar’s pace. Clearly, though, farming isn’t a perennial growth business.
Just as Green Acres’ city slicker Eva Gabor got “allergic smelling hay” in the 1960s TV comedy, crop prices can stay depressed for years and sap the vitality of equipment makers. While Deere outperformed Caterpillar over the past decade, its stock trailed its rival by 109 percentage points in the 10 years before that, when agricultural markets were in the doldrums.
Investors choosing between the two machinery companies are likely to base their decision in part on what has better growth prospects: skyscrapers or ears of corn. At the moment, it is a tossup. Both stocks trade at 90% of sales, which is very close to their 20-year average. Deere has gone as high as 1.85 times, in late 2007 when agricultural investments were all the rage, and as low as 0.4 times, in early 2009.
At such middle-of-the-road valuations, the main bet isn’t on urban or rural growth, but whether the global economic recovery will have a happy ending. Those are only guaranteed in sitcoms.
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