Why I Think Deere Is a Buy Ahead of Earnings

| About: Deere & (DE)

Caterpillar (NYSE:CAT) has recently surged to new highs on an EPS beat and an increase in guidance. I can see cause to be concerned however that CAT may be nearing a top as China slows and construction takes a hit. Deere (NYSE:DE), on the other hand, is more tethered to global agricultural demand and agricultural commodity performance than just construction. Yet Deere seems to be pretty strongly correlated with CAT given that they both produce industrial equipment. As CAT has moved to new heights, one would have expected Deere to do so as well. However, Deere has traded back since year highs in mid-April of 99.80. I think there is something wrong with this picture and that the relative underperformance of DE will be corrected at Deere earnings on May 18th.

Not only did Caterpillar have a strong showing at earnings, but more importantly, Titan Machinery (NASDAQ:TITN) and AGCO (NYSE:AGCO) handedly exceeded expectations and soared after earnings.



Agco Corp.'s (AGCO) first-quarter earnings soared, topping its own estimate as the farm machinery maker's sales rose 35%.

The company also raised its full-year forecast to earnings of $3.50 to $3.75 a share on revenue of $8.3 billion to $8.5 billion from its February estimate of earnings of $2.50 to $2.75 a share on sales of $7.6 billion to $7.9 billion.

Shares jumped 6.9% premarket to $58.70. As of Monday's $54.91 close, the stock has risen 38% over the past year.

Chairman and Chief Executive Martin Richenhagen hinted earlier this month that results could exceed the company's estimate as rising prices for farm commodities should translate into higher farm machinery sales.

Makers of tractors, combines and other gear have benefited from high commodities prices fattening farmers' bottom lines. Agco, whose brands include Massey Ferguson and Challenger, saw end-of-year growth accelerate in Europe and North America amid more muted expansion in South America, which had been a bright spot in recent quarters.

Agco reported a profit of $80 million, or 81 cents a share, up from $10.1 million, or 10 cents a share, a year earlier. Excluding restructuring and other charges, year-earlier earnings were 12 cents a share. The company had estimated earnings of 25 cents to 30 cents a share. Sales jumped to $1.8 billion, beating analysts' estimate of $1.61 billion.

Gross margin rose to 19.8% from 16.9%.

Sales in Europe, the Middle East and Africa, which account for the largest share of the total, jumped 52%. North America sales rose 27% while the South America region saw a 8.8% increase.

-By Melodie Warner, Dow Jones Newswires; 212-416-2283; melodie.warner@dowjones.com


Titan Machinery Inc.'s fourth-quarter net income tripled as the company made some strategic acquisitions with sales of its agriculture and construction equipment surging.

"The economy in the Upper Midwest remains robust, due to projected increases in farm cash receipts and activity around the various oil, gas and coal formations, among other factors," said Chairman and CEO David Meyer.

The North Dakota company reported Monday that it earned $10.4 million, or 57 cents per share, in the quarter than ended Jan. 31, compared with earnings of $3.4 million, or 19 cents per share, in the same quarter a year earlier.

Revenue jumped 46 percent to $368.1 million from $252.3 million a year ago. For the fiscal year, Titan earned $22.3 million, or $1.23 per share, compared with $15.7 million, or 88 cents per share a year ago. Revenue rose to $1.09 billion from $838.8 million a year earlier.

For the current fiscal year, the company is forecasting net income of $27.5 million to $29.4 million, or $1.50 to $1.60 per share, and revenue of between $1.28 billion and $1.35 billion.

That sent shares jumping more than 16 percent to $31.25 in morning trading. The stock earlier climbed as high as $31.47, its highest point since mid-2008.

The Associated Press April 18, 2011, 12:02PM ET

Call me crazy, but when I see Caterpillar, the leading industrial equipment company come in with smashingly good results and the two secondary agricultural equipment manufacturers come in with astonishing results, I find it difficult to believe that DE will also not beat by a country mile. Deere will almost certainly beat and raise. I want to be along for the ride. I believe that $100 was a cap during the trek to recent highs in mid-April. Strong earnings may see that resistance disappear and open the door to higher prices.

Disclosure: I am long DE. May 100 Calls