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Stock Analyst Update

Deere Disappoints, but Looks to the Future

Though outlook for 2001 improves slightly, many uncertainties remain.

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What Happened?
Agricultural equipment maker Deere (DE) on Tuesday reported results for the October quarter that fell well short of expectations, with earnings of $0.30 per share compared with the consensus First Call estimate of $0.39. The company attributed the shortfall to unfavorable exchange rates, weaker sales in its consumer equipment division, and increased spending on new initiatives. It gave a mixed forecast for 2001, saying that agricultural sales should be stronger, but that consumer and construction sales will be down.

What It Means for Investors
Because there's room for further disappointments over the next few quarters, we think investors may want to be cautious in the near term. For the long haul, though, Deere seems reasonably well positioned, given recent initiatives that could boost long-term results but have had the immediate effect of depressing earnings. One example is its exclusive deal with Home Depot (HD), which caused shipments to other retailers to fall sharply during the quarter; sales aren't expected to make up the difference until at least next year. Deere also increased its research and development spending by 25% last quarter, which also contributed to the earnings shortfall and isn't likely to pay off for several years.

Whether or not Deere's long-term projects pan out as well as expected, the company faces a lot of uncertainty over the next year. It warned in August that the market for farm equipment would be difficult through 2001, and a slowing housing market means that construction equipment sales, which account for 20% of Deere's revenue, will probably fall. Thus, even though Deere has taken some positive steps to reduce inventories and cut costs, the nature of the business means that investors should be prepared for a rocky road.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.