Woe A Deer, Revising Bank Earnings

WELL-LOVED DEERE FACES HARD FALL
Deere (DE) faces a painful revaluation of its market cap in Wednesday’s trading, after the farm- and construction-equipment maker posted fiscal second-quarter results, and offered a downbeat outlook for the third quarter. The easy take-away is that rising input costs wiped out the benefits of strong tractor sales. After all, revenues came in at $8 billion, up 18%, and ahead of the $7.6 billion Wall Street had been forecasting. But the easiest conclusion also would be the incorrect one. While it sees worldwide agricultural sales rising 35% in Deere’s fiscal year, its own ag equipment sales in the quarter gained ”only” 19%, versus forecasts of a rise of 23%. In fact, more than a pure-play on the booming farm economy, Deere shaped up as a play on the weakness of the dollar. Of the 46% gain in revenues from sales outside North America, 14 percentage points came from favorable currency exchange. Which means that Deere’s organic sales aren’t as robust as the company is projecting for the industry. Its fiscal third-quarter outlook for net of $550 million to $575 million would, on the low end, miss forecasts by 18%. There’s also no escaping the fact that, while its third-quarter forecast is going to be the issue investors focus on Wednesday, it also missed its second-quarter EPS projection. Deere officials have sporadically talked to the media this year about the impact of rising input costs, but have passed on the opportunity to offer real guidance for the year. Either the company is handling the macro environment badly, or it doesn’t have a handle on it at all. Either way, Deere joins the ranks of equipment makers that have disappointed investors amidst the boomingest farm economy in generations. Shares look to open about seven percent lower.

REMEMBER WHEN BANK ESTIMATES GOT CUT DAILY
In a time not so long ago, the financial landscape was populated by dragons. These dragons wouldst daily swoop down, and turn their incendiary breath on the fundamentals of the once-bountiful banking sector. Back then - it was in February - banks had an Achilles’ heel: asset write-downs. And each day, seemingly, a new dragon would swoop down from the sky, turn its acrid exhalations on the outlook for another bank, and singe the once-bountiful terrain into so much used charcoal, scorching the hopes and dreams of investors, as well. Then, in time - this was March - no more dragons. Until Wednesday. A dragon guised as Goldman Sachs has treated the second-quarter and full-year forecasts for several of its fellow investment banks as so much tinder. Second-quarter estimate for Lehman Brothers (LEH) goes to a loss of 20 cents a share, versus Goldman’s previous forecast of a profit of $1.35. Now, to be fair, in each case, Goldman had been projecting ahead of concensus. For Lehman, the Street has forecast $1.00. For Bear Stearns (BSC), Goldman had been the high, at $2.35, whereas the concensus has been $1.61; Goldman goes to near the low at 60 cents. For Morgan Stanley, Goldman takes the second quarter to 80 cents from $1.60, while concensus has been $1.25. (Of course, where these banks are concerned, it’s worth pointing out, ”concensus” is actually the mid-point of a wide range of estimates, so the number doesn’t really reflect the preponderance of opinion about the forecasts. Also worth pointing out: analysts do a particularly miserable job projecting investment banks’ forecasts, in part because proprietary trading income is so unfathomable.) Goldman said that this round of revisions isn’t another iteration of the view it held three months ago, when exposure to asset write-downs had been the primary driver for taking estimates lower. Now it sees a combination of slower client activities, declines in investment banking advisory services, poor principal and other trading results, as well as other factors as causing the revisions. Regardless, the dragons seem to be circling again.