John Deere Q1 Results Drag Down Agribusiness ETFs

| About: Deere & (DE)

Before the opening bell on Friday, the world's largest agricultural equipment maker, Deere & Co. (NYSE:DE), reported disappointing fiscal first-quarter 2016 results. Though the company surpassed our earnings estimates, it missed on revenues and provided a bleak outlook for full fiscal 2016, reflecting another year of declining sales and continued pullback in the global agricultural sector.

Deere Q1 Results in Focus

Earnings per share came in at 80 cents, comfortably beating the Zacks Consensus Estimate of 71 cents, but deteriorating 28.6% from the year-ago period. Revenues declined 15% year over year to $4.77 billion and lagged our estimate of $4.79 billion.

The global agricultural slowdown and weakness in construction equipment markets were the major culprits for the lackluster revenue performance and this trend is likely to continue this year. Additionally, a strong dollar continues to weigh on the company's profitability (read: Top and Flop Currency ETFs YTD).

As a result, the manufacturer expects 2016 to be another challenging year with overall equipment sales expected to drop 8% for the second quarter and 10% for fiscal 2016. Segment wise, the company expects global construction and forestry equipment sales to decline about 11% in fiscal 2016, including negative currency translation of 2%, and global sales of agriculture and turf equipment to drop 10%, including negative currency translation of 4%. The company also expects net income of about $1.3 billion for fiscal 2016.

Market Impact

Based on bleak outlook, shares of DE dropped as much as 4.7% on the day while trading volume was also heavy with around 9 million shares exchanged in hand compared with the 3-month average of around 3.6 million shares. Rough trading is expected to continue in the ETF world as well over the next few days, especially among those that have the largest allocation to this big agricultural equipment maker (see: all Materials ETFs here).

However, investors should closely monitor the movement of these funds and the stock, and could tap the beaten down prices with a low risk in the basket form. This is especially true as Deere has a solid Zacks Rank #2 (Buy) with additional flavors of a Value and Momentum Style Score of 'B' each.

iShares MSCI Global Agriculture Producers ETF (NYSEARCA:VEGI)

This fund follows the MSCI ACWI Select Agriculture Producers Investable Market Index and offers investors global exposure to 128 firms that are primarily engaged in the business of agriculture. Here, Deere occupies the third position with a 7.9% allocation. From a sector look, agricultural chemicals takes the largest share at 47%, closely followed by farming/fishing (20%) and industrial engineering (18%).

American firms dominate the fund's holding with 45.4% of total assets, followed by a double-digit exposure to Switzerland. The ETF is less popular and illiquid with $24.7 million in its asset base and around 10,000 shares in average daily volume. The ETF charges 39 bps in fees per year from investors and has shed 2.2% post Deere results.

Market Vectors Agribusiness ETF (NYSEARCA:MOO)

This fund is by far the most popular and liquid choice in the space with AUM of about $758.4 million and average daily volume of nearly 215,000 shares. It tracks the Market Vectors Global Agribusiness Index and charges 57 bps in annual fees. In total, the fund holds 53 securities in its basket with DE occupying the third spot at 6.8% of total assets (read: Market Crashing! ETFs & Stocks That Deserve Love).

The product provides nice diversity across business segments with agricultural chemicals accounting for 37% share while industrial engineering (17%), farming/fishing (14%) and packaged food products (13%) round off the next three spots. In terms of country allocation, half of the portfolio goes to the U.S. firms while Canada, Switzerland and Japan get a decent exposure of around 8% each. The fund lost 1.5% on the day of the earnings release.

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