Deere & Company: Canary in the Austerity Coal Mine

by: Markos Kaminis

Deere (NYSE: DE) offered a report to its shareholders and potential investors this week, but we found a message all investors and the global community should take heed of. Deere offered a sort of death threat by austerity.

Revenue jumped 16% and income soared 47%, yet Deere & Company shares dropped almost 2% on the day of its earnings release. What gives you ask? Well, as is usually the case, forward looking investors took heed of the company's forward guidance warning. We cover Deere's report below, but our main intention is to alert investors to Deere's implied warning with regard to Europe and beyond. Broader austerity threatens more than just Greece, in fact, our own economic recovery. We see the impact of European austerity to Deere's results as a red flag for all investors and citizens to take note of, and more immediately for investors in multi-nationals that do business in Europe. We have been warning for some time now about what we believe is a misguided austerity mania that will burden global economic recovery. Deere's issues seem to evidence the start of the realization of our forecast. Deere is, therefore, the canary in the coal mine.

Deere's EPS Release Summary

Deere noted better than expected EPS in its quarterly report, but its forward guidance came in short of analysts' consensus. Deere noted that North American farmer demand for tractors and harvesters were supportive of its overall strength, while European markets were down sharply. Deere also noted what it sees as a bottom in demand for forestry and construction equipment, but reported absolute-basis low level activity in these segments.

Sales were up 16%, and that's pretty good without a doubt. EPS rose 45.5%, and at $1.44 exceeded the analysts' consensus for $1.24 (based on Yahoo Finance). Fine and dandy so far right? The disappointment was derived from the company's view that industry wide sales will drop 15-20% in Western Europe moving forward, on weakness in dairy and livestock sectors. Still, we caught a sniff here of something worse; something bad enough to bury us all 15-50%.

Chairman & CEO Samuel R. Allen said, "John Deere's third-quarter performance reflected the disciplined execution of our business plans and occurred despite continued weakness in certain key sectors. While we have benefited from positive conditions in the U.S. farm sector, particularly in terms of demand for large equipment, European markets are down sharply."

This European softness, and the threat it poses to the global economy, is the focus of our report here.

Deere's European Death Threat

The report cites Deere's agricultural goods issues in Western Europe, Central Europe and in the Commonwealth of Independent States. While the Russian drought is an issue weighing against the company, it appears Western Europe offers the potent poison.

From Deere's release:

In other parts of the world, industry sales in Western Europe are now forecast to decline 15 to 20 percent due to general weakness in the livestock and dairy sectors. High levels of used equipment, especially harvesting machinery, also are weighing on Western European markets. Sales in Central Europe and the Commonwealth of Independent States are expected to remain under pressure due to challenging economic conditions. Drought has affected the region as well, particularly in Russia and Kazakhstan."

EU Eggheads

Data reported on European economic activity earlier this month was taken as a positive, which I found particularly astounding. The popular press drooled over the data simply because EU GDP came in better than expected and was up from a horribly low comparable in Q1. What they missed was most important, the fact that the absolute level of activity was still anemic and that the growth was coming off Armageddon type levels.

Euro-area GDP was up a full percentage point in Q2! Can you imagine such stellar activity? Yes, and even better, it came after 0.2% growth in Q1. Wow!? Further, Q2's result exceeded the brilliant economists' consensus forecast for an increase of 0.7%. This is truly amazing isn't it? Well, the press said so last week, and so most of you bought into it. Thank the Lord for Greek wisdom to put things straight.

It was the fastest growth in Europe in four years. So what! Again, let's think about what we are comparing activity against. For my math deficient friends, including one Canadian, that fabled nation where they profess to knowing more than dumb Americans: Two represents a 100% increase over one. Would you get excited over that kind of a change? No, so temper your enthusiasm about euro-zone GDP expansion of a percentage point.

Exports are on the rise, yes, and were up 5.2% in June in the euro area states (16 nations included). Still, that's thanks to the no confidence vote given to the currency since its Mediterranean members started drowning in that lovely blue sea. My point here is that we should not care that there is demand for exported goods and services if it comes at compensation levels that will bankrupt us (or rather them).

Let's get a grasp around the reality of the situation. Greece's GDP contracted 1.5% in Q2. And I keep remembering that dinner I had with a Greek economic minister, who I guess is a spinster now without his economy. The nice guy had bought into the Kool-Aid every Greek government man is forced to drink. He assured me Greece's economy was different and would not enter recession. There's no need to reread that my friends; you heard correctly. I almost choked on my souvlaki as I tried to contain my contempt (for the statement, not the man).

The same goes for when I sat at a telecommunications meeting of high level Greek ministers, major telecom company representatives and venture capital friends; I asked, “But what makes you so sure Greece will have the money a year from now to subsidize this multi-billion dollar project” (read fiber pipe dream). The reaction of the minister in charge, full of disgust and disdain, as he stated, "of course we will," could not discourage my confidence that they would not.

I'm sorry, but it is this kind of ineptitude that led to this mess in the first place. Whether I'm Greek or not cannot keep me from recognizing it. I wish Greece the best, and I hope the pressure of this major crisis will inspire change that lasts at least past the next summer holiday season.

Economic austerity (read insanity) is weighing and will weigh heavily on economic activity in Greece, and in Spain where Q2 growth managed just 0.2%. Most economists expect the global economy to slow in the second half, and in Europe too. The strength of Q2 was mostly found in Germany, where 2.2% GDP growth marked its best in two decades. Remember, these are developed nations for the most part, old world economies full of people who enjoy life more than ambition; at least when compared to the USA. And I'm definitely not saying we have it better. I think I would much rather die at age 99 after a peaceful life, than at 46 after a stressed out struggle. You can keep the money. I've chosen my way (read another flavor of struggle).

Austerity Threatens Us All

Fiscal concerns came at the wrong time in the '30s, and they have again returned in error now. Despite the warnings of the scholar at the Federal Reserve, our nation joins the dangerous denizens of the European continent in pursuit of austerity. Political perversion has our great nation making the worst mistake of its short life. Yes, our entitlement programs are out of control, and yes our democratic demigods have reached the limit of sane spending. But no, now is not the time to implement austerity. Our economy is burdened by anchored unemployment (with cement shoes), and our townsfolk are surviving on unsustainable government supports. We must first revive our nation from its hangover, taken ill by our communal living beyond our means. Then, once that is accomplished, and only then, can we really address our severe budget issues. Cut the fat, yes cut the fat; but keep the soup kitchens open and the small business incentives coming.

My feeling is that the Europeans will not escape the pit, as they address the most apparent problem and face checkmate next move. But we should know better. We do know better, but we allow politics and politicians, and PR firms and pundits dressed up like newspapers and cable television stations, influence the direction of our lives. Say no to this foolishness! Stand up and tell your politicians to cut out the game playing and work for our better good for a change. Tell them to treat us like adults and not five year olds for a change. We do not need leaders who first consider how to psych us out, and secondly worry about the real problems. We cannot afford the mistakes they will make in the process. We can decide our fate, so choose not death by austerity, but life by lucid legislation.

Relevant tickers include National Bank of Greece (NYSE: NBG), Dexia (OTC: DXBGF.PK), Commerzbank (OTC: CRZBY.PK), Barclays (NYSE: BCS), Lloyds (NYSE: LYG), Royal Bank of Scotland (NYSE: RBS) and Credit Agricole (NYSE: ACA), Deutsche Bank (NYSE: DB), Credit Suisse (NYSE: CS), UBS (NYSE: UBS), Banco Santander (NYSE: STD), Allied Irish (NYSE: AIB), NYSE: BAC, NYSE: GS, NYSE: JPM, NYSE: C, NYSE: UNB, NYSE: WFC, NYSE: TD, NYSE: PNC, NYSE: MS, NYSE: RY, NYSE: BAP, NYSE: KEY. Deere's industry peers include: Caterpillar (NYSE: CAT), CNH Global (NYSE: CNH), Joy Global (Nasdaq: JOYG), Bucyrus International (Nasdaq: BUCY), AGCO (Nasdaq: AGCO), Terex (NYSE: TEX), Manitowoc (NYSE: MTW), NACCO Industries (NYSE: NC), Astec Industries (Nasdaq: ASTE), Lindsay Corp. (NYSE: LNN), Cascade (Nasdaq: CASC), Columbus McKinnon (Nasdaq: CMCO), Alamo Group (NYSE: ALG), Gencor (Nasdaq: GENC), Art's-Way Manufacturing (Nasdaq: ARTW). Other comparables include: Snap-on (NYSE: SNA), Lincoln Electric (Nasdaq: LECO), Toro (NYSE: TTC), Simpson Manufacturing (NYSE: SSD), Eastern (AMEX: EML), L.S. Starrett (NYSE: SCX), P&F Industries (Nasdaq: PFIN), Aerogrow International (OTC: AERO.OB).

Disclosure: No Positions