Deere Runs with Worldwide Sales

With the economy going up and down, it has made many investors wary of making investments with respect to the long term. Even though the market has suffered, there are still a few good plays. Many areas are in long term bull markets that, in my opinion, are just taking a breather and the smart investor could make a bundle jumping in at today's prices. I have hammered the agricultural bull over and over and still believe that it has legs going forward. If you look at my call on CNH Global (CNH) you will see why many companies do look good going forward.

Deere & Co. (DE) seems be a good investment after a disappointing third quarter. In my estimation, DE has been hammered by its exposure to construction equipment, as the United States is in its second worst housing environment in history, second only to the Great Depression. Investors are overly interested in the price of steel margins, but are not as concerned with the price of fertilizer.

Even with the swift decline in the price of natural gas in the United States, we will see worldwide prices increase for some time to come. The price decline is mostly attributed to a "looking ahead" view of the increase in value of the US dollar and not demand. Natural gas prices have not just risen because of demand for heating homes, but because of a massive need of nitrogen fertilizer. Nitrogen is the main component of fertilizer, and corn needs a large amount of fertilizer when compared to other agricultural commodities. I think long term we will see the price of natural gas increase based on the fact that all fertilizer companies will continue to raise prices in the upcoming years.

A major problem that DE seems to be having is meeting demand with respect to combine and large tractor demand overseas. DE's growth in combine sales is less than that of both its competitors, AGCO (AG) and CNH. This isn't due to waning demand but rather due to DE's inability to increase production. This should be met with a 30% combine capacity increase next year, as it has made a $35 million investment in its Illinois facility. I believe this will remedy its capacity issues going forward. In the second quarter it made a $90 investment in itslarge tractor facility in Iowa that will increase capacity by 25%.

DE's third quarter was quite good as it reported a net sales increase of 17%, while net income increased 7%, and diluted EPS was up 12% year over year for the quarter. Equipment operations sales were up approximately 18%. Forecasts for sales of the fourth quarter of this year will increase 29% year over year for the quarter. The full year will be up 21%, a percentage point higher than previously estimated.

From an agricultural standpoint, production tonnage from the 3rd quarter of 2007 increased 28%. Net sales were up 35% and operating profit increased 47%. Looking at crop prices, the Wall Street Journal shows that in January of 2002 soybeans were at a little over $4 a bushel, while corn was at $2 and wheat just under $3. Respectively, those prices have increased to approximately $14, $6 and $7.50 per bushel. It is estimated that we will have the second largest corn crop in history. This will take more combines and large tractors to harvest it. With that, Brazil is rapidly expanding its farmland at expense of the rainforest to grow more soybeans. This will continue to increase demand over the long haul.

Also, if we look at DE's estimate on commodity prices for 2008/2009 we see an increase in the value of all three commodities. If the prices continue to increase, even with the dollar beginning to rebound, it is easily determined that crops will continue to expand, harvests will continue to increase and machinery will be needed. This year's corn price estimate for the full year is $4.45/bushel and will increase to $5.50 next year. Wheat's estimate is $6.92 this year and $7.74 next. Soybeans are $10.60 this year, and $13.50 next. Respectively, these crops were just $3.04, $4.26, and $6.43 for last year.

This is why DE is forecasting agricultural equipment growth of 20%-25% for this year, up 5% in the last quarter for the US and Canada. South American sales were increased for this year to 40% up from 30%. Western Europe has increased to 5% from earlier estimates of 3-5%. Central Europe and Russian demand is increasingly rapidly but there are no growth estimates for these areas of the world. Worldwide net sales are estimated to be up 38% which is a 3 point increase over last quarters estimates for the year.

Looking at worldwide construction and consumer equipment, sales are down 1% year over year and costs will decrease profit by 28%. Even with this net sales should be up 4% for the year. Worldwide construction and forestry will see sales slip 7% and operating profit decrease by 38%. Net sales to be projected down 5% for the full year in this area of business. With respect to third quarter net sales construction and forestry, and construction and commercial accounted for $2.526 billion where agricultural net sales were $4.544 billion. This number shows that the weakness in the other two areas may have caused a bearishness that is too extreme as agricultural growth rates will offset this weakness until there is an improvement in this area.

To keep investors up to date on the importance of agricultural sales, in July, US and Canadian sales saw row tractors for the industry up 38%, while DE saw a much larger increase for that month by double digits more than the industry. Over that same period the industry saw 4WD tractor sales up 49%, while DE saw a bigger increase in sales by double digits again. Combine sales for DE were weaker than the industry but growth was at 31%. DE's combine and row-crop tractors inventorys decreased year over year. Western Europe sales for comines increased in the triple digits for DE and tractors increased in the single digits.

Lastly, looking at share repurchases and dividend increases, DE seems attractive. As of May 28th of this year authorization was made for $5 billion in stock repurchases. The dividend rate increased 12% payable August first of this year. Since 2004 DE has increased its annualized dividend rate by 155%. This shows the companies long term confidence that their stock price is low and that growth looks good going forward. It is estimated that as much as a third of the corn crop could go to ethanol production this year. If these plans stay on task, we could see large increases in crop prices for the next few years and increases in farm land throughout the world. With DE's worldwide, exposure it is a great play going forward.