DE Deere and Co

   (FROM THE WALL STREET JOURNAL 11/25/15) 
   By Steven Russolillo 

Deere & Co. knows all too well the tough times facing American farmers.

The agricultural-equipment industry is poised for its worst sales year since 2009. Net farm incomes are down 38% from a year ago, the lowest since 2002. That also is less than half of the record high hit in 2013, according to U.S. Agriculture Department forecasts releasedTuesday.

Furthermore, Deere's problems at home are an echo of even worse ones globally as grain prices and currencies come under pressure. While it also manufactures outside the U.S., sagging currencies in markets such as Canada, Brazil and Russia have heaped additional pressure on Deere's agricultural-equipment revenue, responsible for about four-fifths of total sales.

Those trends are expected to be on display Wednesday, when Deere reports fiscal fourth-quarter results. Wall Street is aware of the challenges, but the stock -- off 14% this year so far -- looks too rich for bargain hunters.

Analysts polled by FactSet expect Deere to report earnings per share of 75 cents, down 60% from a year earlier. The consensus estimate was $1.43 in January. What's more, Deere's annual fiscal earnings aren't expected to turn higher until 2017.

True, Deere has a history of hurdling low expectations and exceeded Wall Street's profit estimates in each of the past 11 quarters. But the stock has fallen in the trading session following eight of those occasions, often due to downbeat management comments.

Optimistic investors will pin their hopes on evidence suggesting the industry is poised to turn. Notably, farm incomes haven't dropped for three consecutive years since the 1970s. And historically, when they rebound, they tend to do so rapidly.

Even so, Deere's valuation still doesn't fully reflect today's difficult backdrop. Its shares fetch over 18 times the next 12 months' earnings, near their highest level since 2010.Its debt-adjusted market-value-to-sales ratio isn't cheap either at 2.37 times -- just shy of the 2.44 times hit in June, the highest over the past 20 years.

Deere's iconic machines may be green, but its stock likely has more red in store.

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(END) Dow Jones Newswires

November 25, 2015 02:47 ET (07:47 GMT)

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