The American farmer is the backbone of the economy, not just here at home but also around the world. That’s because the fertile farmlands in California, the Midwest, Florida and the Southwest all grow crops and raise livestock that help feed the global population. Providing the big gear to get this massive job done is farm-equipment giant and American icon, Deere & Company (NYSE:DE).
On Wednesday, the Moline, Ill.-based company reported a 26% spike in fiscal third-quarter profit, earning $996.5 million, or $2.56 a share. That bottom-line figure easily bested expectations for a profit of just $2.17 a share during the quarter. That profit beat was largely supported by a big boost in farm machinery sales, which rose some 32% during the quarter.
As for the top-line results, Deere & Company (NYSE:DE) reported a 4% rise in total revenue to $10.01 billion, a figure that also topped expectations. The gains in revenue came not just from the U.S., but from around the world.
Deere & Company (NYSE:DE) said that worldwide equipment sales rose 4% during the three months ended July 31, while equipment sales also rose 4% in the U.S. and Canada. Additionally, the company said that agriculture and turf segment sales rose 8% due to a combination of increased prices and higher shipment volumes.
The positive earnings report by Deere & Company (NYSE:DE) wasn’t enough to send its shares higher, however, as the company lowered its expectations for the coming quarter. Deere & Company (NYSE:DE) said it expected Q4 sales to fall approximately 5% versus the prior year. That downbeat outlook is a bit deceiving, because in the previous fourth quarter, factories had ramped up production to catch up with a backlog of orders.
Executives addressed this issue in their earnings conference call, stating that the lower agriculture sales prediction “does not indicate any change in our outlook for demand or global ag fundamentals.”
The post-earnings dip in the shares is something I think traders can take advantage of to get in on DE at an attractive price.
Taking a position in DE here should allow investors to take advantage of the time running out on a tax subsidy helping push farm-equipment sales higher.
According to The Wall Street Journal, “farmers can deduct as much as $500,000 a year from their federal income taxes for equipment purchases up to $2 million. That’s double the deduction allowed in 2009 and four times the 2007 level. But the deduction limit is scheduled to shrink to just $25,000 next year. Farmers can further reduce their taxes by claiming an extra-large depreciation allowance on new equipment. The so-called jumbo depreciation program is scheduled to expire at the end of 2013.”
The soon-to-be-reduced tax benefit for buying farm equipment in 2013 is a factor that’s already helped U.S. farm equipment sales rise to their highest levels in three decades, according to The Wall Street Journal.
And, according to the Association of Equipment Manufacturers, U.S. sales of new high-horsepower tractors have grown 11.4% annually since 2006, a figure that represents a tripling of the growth rate between 1999 and 2005. Moreover, sales of four-wheel drive tractors, which are often used on very large farms, have risen approximately 15% annually since 2006.
I expect this tax-advantage buying to continue for the rest of the year. I also expect that buying to boost Deere & Company (NYSE:DE)’s top and bottom lines in fiscal Q4, and that should mean another big earnings beat three months from now. Traders who get in now could see shares jump by 10% or more over the next few months.
Recommended Trade Setup:
— Buy DE at the market price
— Set stop-loss at $77.15, approximately 8% below the current price
— Set initial price target at $92.25 for a potential 10% gain in four months
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