John Deere: Less green, more red
Today's Financial News - Posted February 18, 2009
A lot of investors were expecting too much from Obama’s stimulus plan. They thought companies like Deere (NYSE:DE) and Caterpillar (NYSE:CAT) were sure bets. Today, they are realizing they made a big mistake.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): In my hometown, it is not unusual to pass a pickup truck with a John Deere license plate. It is also not unusual to hear that the highly recognizable color “John-Deere green” was a theme at a local wedding. The ubiquitous tractors play a large role in nearly every rural community.
But just because a brand has a diehard customer base, which has been known to fight over brand loyalty with the “red” tractor owners, does not mean it is recession proof. For proof, look at Harley Davidson (NYSE:HOG) and its plummeting share price.
Many investors thought John Deere & Co (NYSE:DE) would be a strong benefactor of the Obama administration’s opulent stimulus package, but it is looking more and more like recent investors made a big mistake.
There are two main reasons the company was forced to cut its annual forecast this morning, a huge inventory buildup and a decline in commodity prices.
While John-Deere green may have the largest following, the products that get the company’s yellow paint have been hot sellers over the past few years. As the economy boomed and houses popped up like uncontrollable weeds, the Deere’s industrial lineup became a huge profit driver.
But now that construction companies are writing more pink slips than they are digging holes, the company’s sales have dramatically declined. Even with the promise of increased infrastructure spending over the next year or two, companies have no reason to go out and buy new equipment. After all, backhoes and graders do not wear out overnight and many companies are still paying for the equipment they purchased during the boom.
Equipment inventories at construction companies and equipment retailers is dangerously high. Deere will have little demand for its products until dealers clear their lots of the currently unwanted tractors.
Painting green, but seeing red
Deere can weather a downturn in the “yellow-paint line.” It has done it before.
But never has the company had to deal with a simultaneous decline in its farm-tractor lineup. So far, the “green” lineup has weathered the storm fairly well, with an 18% increase in sales last quarter. But with commodity prices falling and major food growers filing for bankruptcy protection, the nation’s farming industry is hurting and will fall even further.
Not only can most farmers not afford new tractors, soon they will not be able to afford those fancy John Deere hats and diamond-plated license plates. The double downturn is creating an incredibly strong headwind for Deere.
According to reports this morning, the company’s fourth quarter profits dropped by nearly 50%, forcing it to reduce its 2009 net-income outlook to $1.5 billion, from a previously reported figure of $1.9 billion. Even the new figure may be too high if the agriculture sector tumbles like many expect it to.
John Deere may be famous for its green, but the company will see a lot of red over the next two years.
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