Why Deere Is Not a Short

Shares of Deere & Company (DE) have tumbled more than 8% on Friday's morning session after a weak sales outlook combined with low prices of crops and negative impacts of a strong dollar.

The company reported earnings per share of $1.53, which were less than the $2.33 per share obtained in the same quarter a year ago but were higher than estimates by $0.09. Further, revenue declined by 20.1% and reached $7.59 billion but was higher than analyst's estimates of $7.17 billion.

For the fourth quarter of 2015 the firm expects equipment sales to decline 24%.

For the full fiscal year 2015, the firm expects net profit of $1.8 billion, lower than the earlier projection of $1.9 billion. Equipment sales are now projected to decline by 21% more than 200 basis points of the previous forecast.

"John Deere's third-quarter results reflected the continuing impact of the downturn in the farm economy as well as lower demand for construction equipment," said CEO Samuel Allen. "Nevertheless, all of Deere's businesses remained solidly profitable, benefiting from the sound execution of our business plans and the success of our efforts to develop a more agile cost structure."

The company is selling at a reasonable valuation. The P/E ratio as of 8/20/15 is 11.36, which seems low when compared to the S&P of about 21x. Further, the dividend yield is more than 100 basis points when compared to the industry median, but remains flat at $0.60 quarterly. Considering 333.9 million shares outstanding at the end of the second quarter and an annual dividend of $2.40, the company will pay $801M in dividends (42% of estimated net income -$1.9 billion-). Share repurchases of $1.2 billion (already bought in 2015) makes more than 100% of net earnings, showing commitment to return value to investors.

Deere is well-positioned to achieve good returns throughout the business cycle as global demand would increase in the future.Deere is a great company with solid catalysts but currently faces pressure due to falling demand. Despite this, many analysts consider that the company can survive from the current scenario due to a strong balance sheet.

The stock plummeted 5.62% in a year-to-date basis and 3.14%in the past 12 months.

Warren Buffett's Berkshire Hathaway (BRK.A) is the major shareholder, with a stake containing 17.31 million shares of the stock, valued at $1.68 billion at the end of June. Hedge fund gurus like Steven Cohen, Paul Tudor Jones, and Andreas Halvorsen have initiated new positions in the stock during the second quarter.

Published on Aug 24, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2020. Content published with author's permission.

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