ETFs To Consider On Deere & Company’s (DE) Optimistic Outlook

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November 25, 2013 1:33pm NYSE:MOO NYSE:VEGI

agriculture 600X300Thanks 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.

Market Impact

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.

In total, the fund holds 50 securities in its basket. Of these firms, DE takes the third spot, making up roughly 6.79% of the total assets. The product provides nice diversification across business segments with agricultural chemicals accounting for 44% share while farming/fishing (20%), and industrial engineering (19%) rounding off the next two spots.

In terms of country allocation, U.S. (48.3%), Canada (10.4%) and Switzerland (8.2%) occupy the top spots. The fund added nearly over 1% in the year-to-date time frame.

iShares MSCI Global Agriculture Producers ETF (NYSEARCA:VEGI)

This fund provides exposure to the firms of developed and emerging nations that are primarily engaged in the agricultural business at or near the initial phase of agricultural input and production. It follows the MSCI ACWI Select Agriculture Producers Investable Market Index and holds 125 securities in its basket.

Here again, Deere occupies the third position with 7.85% allocation. From a sector look, agricultural chemicals take the largest share at 52%, closely followed by farming/fishing (23%), and industrial engineering (17%). American firms dominate the fund’s holding with 43.46% of total assets while Canada, Switzerland and Japan receive modest allocations.

The ETF is less popular and illiquid with $41.6 million in its asset base and around 12,000 shares in average daily volume. The ETF charges 39 bps in fees per year from investors. VEGI delivered almost flat returns in the year-to-date time frame.

Bottom Line 

Both ETFs seem to be under pressure on the sluggish agricultural business environment. However, upbeat Deere’s fourth quarter results and the positive outlook have laid a strong foundation for many firms in the sector.

Further, rising needs of better infrastructure, modernized methods of agriculture and growing complexity of mining/manufacturing methods would boost the demand for technologically advanced equipment in this industry (read: Time for This Top Ranked Industrial ETF?).

Given this, investors could definitely take advantage of the current slowdown in the agricultural space as well as solid earnings results from equipment makers at the same time.

This article is brought to you courtesy of Eric Dutram.

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