Wednesday, August 13, 2008

Deere (NYSE:DE): Colour on quarter

Citigroup comments on Deere (NYSE:DE) following results and pre conf call:

- Firm notes Ag profits were upside surprise, Construction and lawn care downside (more Construction than lawn care segment). Higher than expected tax rate cost the quarter $0.03.

Stock Reaction: After AGCO's and CNH's solid reports set the bar a little higher for Deere, this report, despite the strong Ag results, will push stock lower this morning, in firm's view. Key to report is 4Q guidance weak with costs sounding like a major element as rev guidance for 4Q of +29% is strong (despite slightly lower than expected 3Q revs, strong 4Q raises full yr rev guidance from 20% to 21%. However, for bulls, they will feel better that 4Q is a cost issue, not a revenue issue. Citi notes they are aware of many investors looking at Deere as improving price vs cost story for '09 when new large equipment models get the announced price increases of +5%+ (especially with commodity prices having pulled back suggesting less input cost pressure), with ag equipment demand being up in '09 as better than avg predictability, along with the strong Deere balance sheet as a security blanket. Stock likely finds strong support around $65-$66 (10x-12x range of '09 EPS assumptions).

Maintains Buy and $98 tgt.

Notablecalls: I have DE on my radar as a bounce candidate this morning.

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