Improving Global Environment Signals Buy Ratings

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Includes: CAT, DE
by: Johnathan Galt

Summary

Deere reported net income of $802.4 million up an impressive 62% from $495.4 million a year earlier.

Caterpillar's global construction sales increased 8%.

The Philly Fed report showed manufacturers are seeing increased orders and shipments.

Both John Deere (NYSE:DE) and Caterpillar (NYSE:CAT) are up today due to results that support a favorable outlook in both the agriculture and construction industry. John Deere is up 7% after raising guidance for the second half of 2017 on improvements in the global economy. Caterpillar, up 1%, released retail sales for the past three months showing a worldwide increase on strong growth in Asia. Both equipment providers results support economic reports that forecast increasing growth for manufacturers.

John Deere delivered second quarter 2017 earnings of $2.49 per share on $8.287 billion in revenue. The farming and construction equipment provider reported net income of $802.4 million up an impressive 62% from $495.4 million a year earlier. Earnings fell short of expectation while revenue beat estimates. However, the results were strong enough to reduce concerns end related to the impact of global farming recession that has been affecting key regions such as South America. Deere also raised earnings and revenue outlook citing continued growth in its international market.

South America was and will continue to be a bright spot for agriculture. Political stability in Brazil and Argentina is driving increased investing in capital intensive durable goods which includes Deere's farm equipment. Tractor and combines sales are projected to increase by 20% as a result of the improving conditions.

John Deere also gave insight into the strength of an improving construction environment world wide as fiscal year 2017 net sales are expected to rise 13%. This is up from previous forecasts of 7%.Further, Deere revised its 2017 outlook as it forecasts sales to rise by 9% through October 2017, versus previous estimates of 4%. Full year earnings outlook improved to $1.35 billion from $1.2 billion.

Caterpillar, a competitor to John Deere, released its retail sales that echoed strength in the construction industry. World Wide construction sales increased 8% with strong markets including 59% growth in Asia and 3% in Latin America.

In Caterpillar's most recent quarterly report management raised its full year 2017 outlook citing an improving political landscape and a increasingly stable environment for commodity prices.

A third source of data to support an improving environment was the May Manufacturing Business Outlook Survey, conducted by the Philadelphia Federal Reserve that reflected continued optimism in current and future growth for manufacturers. The May Index reading of 38.8 handily beat economists' forecasts of 19.6. The index is derived from values related to new orders and shipments. The survey also concluded continue optimism from manufacturers over the next six months.

These results should be viewed by investors as leading indicators of an improving economic environment both domestically and internationally. When performance of durable goods, which is very capital intensive, improves this signals an economic expansion. Investors should remain bullish on these two companies as both Deere and Caterpillar continue to benefit from global expansion in emerging markets.

Disclosure: I am/we are long CAT, DE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.