DE Deere and Co

By Steven Russolillo 

Farm-equipment makers can't catch a break.

Lower prices for corn, soybeans and other commodities have squeezed farmers' incomes across the globe, prompting them to cut back significantly on equipment spending. That has upended companies such as Deere & Co., the world's largest seller of tractors and harvesting combines. Its sales and profits have dropped for nine consecutive quarters.

Hoping for a bottom since this slump began in 2014 hasn't been a wise strategy. The maker of the iconic green-and-yellow farm machines already has cut its full-year outlook twice so far this year. Unfortunately, more pain is likely in store when it reports fiscal third-quarter results Friday.

Analysts, who have significantly ratcheted down their estimates for Deere, now expect earnings of 94 cents a share, down 38% from a year ago. Revenue for the period ending in July is estimated to have declined by 11% to $6.1 billion.

Falling incomes have prompted many farmers to cut their investment spending. And now, many of Deere's customers prefer to lease machinery rather than purchase it.

The problem is that much of Deere's equipment has significantly depreciated in value. The company took a write-down earlier this year on the residual value of its used equipment. As customers have been more prone to walk away when their leases expire, Deere has been working to restructure more leases.

Efforts to manage this overcapacity will likely play a prominent role in the next move for Deere's volatile stock. Shares are essentially unchanged for the year but are down more than 20% from last summer's peak.

Deere typically hasn't fared well after earnings reports, either. Its stock has dropped following 16 of its past 21 quarterly reports dating back to 2011.

And if history is a guide, the worst might not be over for Deere's share price. In the financial crisis, Deere lost about three-quarters of its market value. And in 2011, the stock dropped about 40% peak to trough.

Currently fetching about 21 times projected earnings over the next 12 months, the stock's multiple is among its highest levels over the past five years.

This stock's drought isn't over just yet.

(END) Dow Jones Newswires

August 18, 2016 14:31 ET (18:31 GMT)

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