Deere’s (DE) third quarter earnings report on August 19 confirmed what the company forecast in its second quarter report: forget about 2009.
In the quarter earnings per share fell by 25% to 99 cents from $1.32 in the third quarter of 2008. Revenue dropped 24% to $5.89 billion.
The drop in quarterly sales—the second consecutive year-to-year drop in quarterly numbers—came as the global recession continued to reduce demand for construction, forestry, and home lawn equipment.
The next quarter isn’t going to be any better either, the company said. Deere forecast that fourth–quarter sales will tumble 34% from the fourth quarter of 2008.
Now the question is When do things start to look better?
The company’s forecast of a 21% drop in sales for all of 2009 is down slightly from its May 20 estimate of a 19% drop in 2009 results.
Farm equipment sales have held up reasonably well in the United States thanks to big harvests of corn, forecast by the U.S. Department of Agriculture to increase by 5.5% from 2008 levels, and soybeans, forecast up 8.1%.
But investors shouldn’t expect an increase in sales in this sector unless commodity prices pick up. Deere’s sales of farm equipment closely track farm incomes and in this quarter’s conference call Deere lowered its 2009 and 2010 forecasts for U.S. farm cash income. In 2009 cash income is expected now expected to be about $5.5 billion less—or about 1.7% lower—than Deere’s earlier forecast. The company also reduced its 2010 forecast for farm cash income to $309.3 billion from the earlier $315.9 billion.
The forecasts are based on a projected decline in corn prices in 2009-2010 to $3.40 a bushel from an earlier estimate of $3.80.
But the key to 2010 is stabilization in the lawn and garden, and construction and forestry segments. Construction and forestry sales fell 47 percent to $632 million in the quarter.
I still think those markets will show much more modest declines in 2010 and could even register year-to-year increases in the second half on very weak comparisons to the year earlier quarters.
As of August 25 I’m leaving my target price at $56 but stretching out the schedule to July 2010 from June.
(Full disclosure: I own shares of Deere in my personal portfolio.)