Thanks to ever-expanding world population and technological needs for mechanized agriculture, the agriculture and forestry machinery industry is gaining immense strength. This trend is clearly visible as one of the world’s largest agricultural equipment makers, Deere & Company (NYSE:DE), reported stronger-than-expected results and an upbeat outlook in its recent fiscal fourth quarter release.
The company expects robust sales from construction and forestry equipment that would offset the sluggish demand for agricultural machinery. This has spread optimism in the broad equipment sector heading toward the New Year suggesting that investors could take a look at this industry and the in-focus company.
The agriculture market is currently enduring the worst of sluggish global demand and a supply glut, weak emerging market currencies, and low crop prices due to a longer planting season. However, the machinery industry is benefiting from increasing economic activity, leading to growth in demand for industrial products.
Deere Earnings in Focus
Deere surpassed our estimates on both the top and bottom lines. Earnings per share came in at a record $2.11, comfortably beating the Zacks Consensus Estimate of $1.89 and above the year-ago earnings of $1.75. Though revenues fell 3% year over year to $9.45 billion, it strongly beat the Zacks Consensus Estimate of $8.8 billion.
The manufacturer provided a bullish outlook for the full fiscal year. Though the company expects equipment sales to drop 3% in fiscal 2014 on weak demand for agricultural machinery, construction and forestry equipment sales would grow much higher at 10% for the year in the wake of U.S. economic recovery and an increase in housing starts (read: Timber ETFs: The Best Housing Recovery Plays?).
As such, net income is expected to be around $3.3 billion for fiscal 2014, down from $3.54 billion in fiscal 2013 but well ahead of the Street’s expectation of $3.04 billion.
Driven by this earnings beat and the company’s optimistic outlook, the shares of DE jumped over 3% initially but closed a little lower with a nearly 2% rise on Wednesday on elevated volumes. Given this, the following two ETFs could be worth a closer look by investors seeking to ride out the recent surge in the farm-machinery sector.
These products have the largest allocation to the big agricultural equipment maker and look to be in focus in the coming days with room for upside. The companies engaged in the farm-machinery business, including Deere, will benefit from an insatiable global food demand (see: all Materials ETFs here).
ETFs to Consider
Market Vectors Agribusiness ETF (NYSEARCA:MOO)
This fund provides exposure to the global agribusiness industry by tracking the Market Vectors Global Agribusiness Index. It is by far the most popular and liquid choice in the space with AUM of over $4.7 billion and average daily volume of nearly 322,000 shares. The ETF is one of the low cost choices in this space, charging 55 bps in annual fees.