John Deere's (DE) earnings yesterday are a good overview of what is going in the agriculture market. To sum the earnings up, 2009 is going to be ugly but the long-term fundamentals are bright.

DE reported FY09 1^st quarter earnings with EPS of $0.48, versus consensus of $0.63. The company also reduced its FY09 annual earnings numbers from $1.9 billion to $1.5 billion, citing numerous headwinds including slowed global sales as well as ongoing FX challenges.

These results really aren't all that surprising however, given that previous projections from the company were widely viewed to be optimistic, unsupported by weakening fundamentals in most areas. In our opinion, the news seems to be a reality check for DE forcing it to revert to a more conservative outlook, mimicking the broader view for industrial equipment as a whole.

Highlights From the Earnings Release and Call:

DE noted that it is suspending its normal quarterly projections due to, "uncertain conditions in the global economy, including volatility in foreign exchange rates". This move will likely reduce some of the volatility surrounding Deere shares, however it also serves as an omen that the company is operating in an environment where visibility is severely limited over the next year.

Challenges in the broader global economy will likely persist as credit remains tight and corporate spending remains stagnant. However, there is one bright spot in DE's outlook that we believe will traverse the current economic pullback, supporting broader long-term trends of demand for infrastructure and food; Agricultural products.

Agriculture and Farming Remains the One Performer

Despite downward pressure from rising material costs, a global recession that is picking up pace and global FX rates that have been extremely volatile, Deere management highlighted areas that exhibited some positive trends, specifically the Agricultural segment. The ongoing expansion into a truly global market has served to support DE's operations, with global demand for food and infrastructure improvement continuing in spite of the current recessionary environment.

Much of the support in the Ag segment, as CEO Robert Lane reported, is due to the sound financial health of the U.S. farm sector. The farm sector seems to be the one bright spot right now for DE as the Agricultural segment increased sales 18% incrementally, compared to negative sales growth in all other segments. Operating profit also increased 5% YoY, largely driven by increased shipment and production volumes. Going forward, sales in this segment will likely move flat to slightly negative on a global basis, with DE projections of flat to +5% for domestic and Canadian operations.

Given the current environment and near term weakening of global demand for large equipment in FY09, we believe domestic (including Canada) Ag operations will remain the one bright spot for Deere through this fiscal year.

- GDH