Makers of agricultural and construction equipment have, on the back of global recovery, been able to grow earnings encouragingly over the last few years. With farms awash with cash, many agricultural corporations have the means to invest in new equipment which has greatly benefited manufacturers. Deere & Company (NYSE:DE) has once again managed to beat earnings delivering record first quarter results. Additionally, the industry seems to be trading at a discount to the broader market, which may fuel further gains for the stock and its competitors.
Stock at a Glance
Deere & Co (NYSE:DE) is one of the world’s largest manufacturers of agricultural and construction equipment, enjoying a market cap of about $36.5 billion. Their products include tractors, combines, harvesters, excavators and mowers. Founded way back in 1837, the firm has around 66,900 employees. The stock is up just over 7% in the last year, has a beta of 1.38, and yields 2% annually.
For the eleventh consecutive quarter of record earnings, Deere reported EPS of $1.65 for Q1 2013, or net income of about 650 million dollars. This blew away the EPS consensus of $1.40 and was up about 35 cents a share compared to the same period last year, representing an increase in EPS of nearly 27%. Strong sales volume drove earnings for the quarter, with net sales for equipment up 11%. North American sales were particularly strong with an 18% increase in sales, compared to a 2% increase outside of the United States and Canada including a 3% negative currency translation effect.
Other factors that helped drive the strong performance included higher sales prices for farm machinery, but the bottom line was hampered by higher production costs related to manufacturing-overhead expenses among other things. Management is fairly optimistic about full-year 2013 expecting an increase in equipment sales of 6% and net income of about 3.3 billion dollars. However, the industry in which the company operates is very sensitive to the global economy in general and the state of agriculture in particular. Although the company expects farm business to be rather good this year, the outlook is tempered by uncertainties over fiscal, economic and trade issues. Europe is a bit of worry, and it is predicted that the area will see a 5% drop in agricultural and turf sales due to the weak macro-economic backdrop.
Valuations and Metrics
Deere currently trades at a slight premium to the industry average, with a TTM P/E of 12.32x compared to 11.2x. For reference, the Dutch CNH Global NV (ADR) (NYSE:CNH) currently trades at 10.2x earnings and Kubota Corp (ADR) (NYSE:KUB) at around 16x. However, Deere has higher quarterly revenue growth as well as a higher 5-year expected EPS growth rate than most of its major competitors. YoY quarterly revenue growth for Deere sits at around 14%, compared to Kubota’s 13% and CNH Global’s 3%. The 5-year expected EPS growth rate is an impressive 19.8%, compared to Kubota’s rather low 3.6% and CNH Global’s also very decent 15.4%.