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Deere & Co preparing for poor results

The farming machinery manufacturer will announce its first-quarter figures on Friday 20 February. The low agricultural commodity prices have hindered the company’s performance. 

Farming machinery
Source: Bloomberg

The agricultural company will reveal its numbers for the first three months of the year, and the market is already expecting a drop off from last year’s figures. Falling gain and wheat prices have prompted farmers to curtail capital expenditure and this is resulting in lower revenue and profits for Deere. While bumper harvests of crops in North America continue to be the norm, the demand for Deere’s tractors and harvesters will keep slipping.

The Western-imposed sanctions on Russia have driven the economy into recession, sales to Russia and many of its neighbours in eastern Europe and central Asia have also suffered as a consequence. The slow down in South America, particularly Brazil, has also played a part in Deere’s falling income stream.

In the fourth-quarter of last year the company’s profit dropped by 20% and earning farm machinery alone declined by over 30%. Deere has done a good job of managing expectations, and even though sales and earnings declined, both exceeded estimates. Deere derives over 70% of its income from farming machinery, but the company is expanding its operations in construction and forestry machinery in order to diversify its business. The company recently announced jobs cuts to agricultural plants in Iowa and Illinois, and as the firm foresees a 20% fall in farm machinery orders this year, more jobs cuts are likely in 2015.

The market is expecting revenue of $5.6 billion and earnings per share of $0.83 when Deere reports its first-quarter figures. The fourth-quarter results impressed traders, with revenue coming in at $8.04 billion and EPS of $1.83 when the market was anticipating $7.66 billion and $1.57 respectively. The firm will reveal its full-year numbers in November and the market is expecting revenue of $28.94 billion and EPS of $5.52, which equates to a 12% drop in revenue and a 36% decline in EPS.

Equity analysts are bullish on Deere. Out of the 25 recommendations, seven are buys, and 11 are holds, and seven are sells. The average target price is $86.17, which is 2.9% below the current price.

Investment banks are also bullish on Caterpillar, and out of the 29 ratings, seven are buys, 20 are holds, and two are sells. The average target price is $83, which is marginally below the current price.

The number of short positions being taken out on Deere has increased by 8% since the fourth-quarter figures were announced. The stock is receiving support at the 50-day moving average of $88.83, and should this level be held $94 will be the target. If the 50-DMA is punctured it will then act as resistance and the downside support of $84 will be brought into play.

 

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