Update August 19, 2016. It’s not often that you’ll see a stock climb 13.49% on the day when the company announces that full year sales will fall 10%, worse than the 9% drop it had forecast earlier.
But that’s the story today for Deere (DE.) The stock’s move, I think, says as much about the market consensus about economic and earnings growth–or actually the lack thereof–as it does about Deere itself.
Deere announced today, August 19, earnings of $1.55 a share for the June quarter, up a scant 2 cents a share from the $1.53 that Deere earned in the June quarter of 2015.
That scant earnings growth, however, was hugely better than the 94 cents a share that Wall Street analysts had been projecting. Analyst pessimism was fully justified because Deere’s business is at a cyclical low. A record corn crop this year has sent grain prices–and farm incomes–falling and sales of Deere’s farm equipment closely track the rise and fall of farm incomes. Tractor inventories are a a seasonal record and there’s no sign of an early turn around in sales. Revenue fell to $5.86 billion for the quarter, from $6.84 billion in the June quarter of 2015, and well short of the $6.06 billion in revenue forecast by Wall Street.
What analysts did under-estimate, though, was Deere’s ability to cut costs and then cut them some more. For the quarter Deere managed a 16% reduction in the cost of sales. That isn’t a one-time reduction either. By the end of 2018 Deere expects to boost pretax income by at least $500 million–even if the current farm downturn continues, Deere CFO Rajesh Kalathur said in a post-earnings release conference call. Today the company raised its forecast for net income for the full fiscal year that ends in October 2016 to $1.35 billion from a May forecast of $1.2 billion.
Is this kind of earnings growth based on cost-cutting worth a 13.49% one-day jump in the share price? Maybe not in an economy and stock market were companies are finding it easy to grow top line revenue and bottom line earnings.
But that isn’t the economy or the stock market we have right now. Earnings for the Standard & Poor’s 500 stocks were down again this quarter and are now forecast to fall again in the third quarter, although by a smaller percentage. A drop in third quarter earnings would mark a sixth straight drop in quarterly earnings. That’s a real earnings recession.
In that context earnings from cost cutting (or any source, in fact) look really good–especially if a company can produce a cost reduction in the neighborhood of 16% and also forecast that it believes that it can continue to cut costs even as the company’s business continues to limp along the bottom of a deep cyclical downturn.
Deere has been a member of my 50 stocks portfolio since December 30, 2008. The shares are up 131.93% in that period as of the close on August 19. The stock comes with a decent 2.75% yield.
Given the kind of cost cutting that Deere has promised and that management looks capable, on the record, of delivering, I’d certainly hold onto these shares. The trailing 12-month PE ratio is just 16.92. The shares are down 2.1% over the last year and up only 14.49% for 2016 to date.
Update February 20. As bad as the first quarter earnings report Deere (DE) delivered on Friday, February 19, was, I’d argue that its take on the farm sector was even darker.
For the first quarter farm, construction, and forestry equipment sales fell 15% year over year at Deere to $4.8 billion. That was below the already depressed $4.9 billion expected by Wall Street and below the 11% drop the company had forecast in November. Sales of farm machinery dropped by 12% year over year.
Earnings per share of 80 cents were down from $1.12 in the first quarter of 2015. The results were helped by a lower tax rate. Wall Street analysts had expected 70 cents a share. Even with an 11% reduction in costs during the first quarter operating profit margin still fell to 7.4% from 10.%. For the 2016 year the company cut its forecast for net income to a range of $4 to $4.20. The consensus for the year had been $4.24 a share.
Deere is widely seen–justifiably–as an indictor of the condition of the U.S. and global farm sector. And here the company’s forecasts were truly sobering. Deere projected that its farm equipment sales would be down 10% in 2016 after it forecast a 7% drop in November. But that was still better than its forecast of a 15% to 20% decline for the North American market as a whole. The company also cut its forecast for total cash receipts from farming in the United States in 2016 to match a very pessimistic forecast from the U.S. Department of Agriculture last week. Sales of farm equipment closely track farm income. Farmers don’t readily spend money they don’t have–especially when they’re coming off a period of booming incomes and heavy purchases of new equipment.
Deere is a member of my long-term Jubak Picks 50 portfolio. The stock will benefit in the long term from growing demand for food as more global consumers move into the middle class. That story, however, is on hold at the moment. In my new timing system for this portfolio I’d rate Deere as untimely, wait. At some point farm incomes will go back into a growth mode and the more age farmers put on their current machinery, the sharper the rebound will be. But this doesn’t look like a 2016 story or stock.
Deere’s struggles and forecasts have negative implications for other farm sector stocks in the portfolio such as Potash of Saskatchewan (POT) and Monsanto (MON). Fertilizer, agricultural chemical, and seed stocks don’t look like good bets for 2016 either.
If you want to get really, really depressed about the near-to-medium term prospects for the agricultural sector, may I recommend Deere’s (DE) December investors presentation? (It’s posted on Deere’s web site at http://investor.deere.com/files/doc_financials/Investor-Presentation-Dec14-FINAL.pdf )
On the other hand, if you want to read a strong case for Deere’s own long-term prospects, I’d recommend the same document. This stock remains in my long-term Jubak Picks 50 portfolio because of that case http://jubakam.com/portfolios/ .
The depressing news? In fiscal 2015 (which ends in October 2015) Deere expects sales of agricultural equipment across the sector to be 25% to 30% lower than in fiscal 2014 in the U.S. and Canadian market, 10% lower in the European Union, 10% lower in South America and slightly down in Asia. Sales of large agricultural equipment—the big tractors that Deere sells, for example—will drop more than the sector as a whole with big equipment sales falling 40%. That will bring the two-year drop in big equipment sales to about 60%.
Deere expects that it’s sales will hold up slightly better than that—with sales down 15% in 2015—but we’re still talking about a crushing downturn in the sector. Credit Suisse calls it one of the worst U.S. farm downturns ever—made worse by declines overseas.
And yet—Wall Street analysts expect Deere to earn $5.53 a share in fiscal 2015. Granted that’s a huge drop 37% drop in earnings per share from fiscal 2014’s $8.75. But it’s still a long way from a loss—and a pretty stunning accomplishment in the midst of a 60% drop in sector sales. In fiscal 2016 Credit Suisse expects Deere’s earnings per share back to near the $8.75 of fiscal 2014.
That’s a pretty good performance for a horrendous sector downturn.
But if you’re looking for hope rather than just the assurance that things aren’t as bad as they could be, I’d suggest reading deeper into the Deere presentation. The company spends a couple of slides talking about integrating data from farm operations with its equipment. Granted that doesn’t pop right out at you as a big innovation, but it is. And it puts Deere, along with other sector players such as Monsanto (MON), at the leading edge of a big trend in farming. With the cost of farm inputs—fuel, seed, fertilizer, water, etc.—soaring, farmers are looking for companies that can not just sell them products but that can also do the heavy Big Data number crunching that lets them use those products most efficiently. That’s why Monsanto has moved into the weather data business through the 2013 acquisition of The Climate Corp. for $1.1 billion. And why Deere acquired Brazil’s Auteq Telematica on December 4.
Auteq Telematica is an onboard software and computer company that specialized in technology solutions for sugarcane growers. The deal expands Deere’s presence in Brazil and in the sugarcane industry, but just as important it is an example on the growing importance of Big Data services in the farm sector. Deere, according to its press release on the deal, sees the acquisition as a way to help customers leverage the data produced by onboard computers used in the equipment that plants, cultivates and then harvests the sugarcane crop. The important trend here is to put data collection and crunching together with farm equipment in order to increase the productivity of farmers.
Always glad to see a company pushing the envelope like this in the middle of tough times for the sector. As with that strategy at Cummins (CMI), another long-term Jubak Picks 50 stock, competitors have to match these moves while they are stressed by the sector downturn, or give up future market share to Deere.
I think there’s a good likelihood that Deere will be cheaper sometime in 2015 as investors get discouraged by a farm sector downturn that is likely to drag on and on and on.
Today, December 9, I’m rating these shares “Neutral” on price. I’d like to get these shares at $80 or lower. They closed on December 9 at $89.20.A horrible
Good news from Deere (DE) on fiscal first quarter 2014 earnings. The company announced earnings of $1.81 cents a share, 28 cents a share above the Wall Street consensus on revenue of $6.95 billion. (Also above Wall Street consensus of $6.76 billion.)
But the company’s closely watched estimate of farm incomes pointed to a drop in cash receipts in 2014 of 7% from the record level of 2013. Global corn planting is likely to fall in 2014, Deere reported.
That’s certainly not good news for such agriculture stocks as fertilizer producers Potash of Saskatchewan (POT), Mosaic (MOS) and Yara International (YARIY.) And it’s not good news for Deere for 2014 as a whole either. The company lowered guidance for the quarter that ends in April to sales of $9.65 billion versus the current Wall Street consensus of $9.89 billion. That would represent a 6% drop in sales in the quarter.
Deere’s agriculture equipment sales weren’t all that robust in the quarter with sales of farm equipment climbing just 2% year over year. Operating income for that part of Deere’s business (78% of sales in 2013) climbed 4%. It was the recovery of sales for construction and forestry equipment that led to the first quarter earnings beat. Sales for those businesses climbed 4%, but operating income grew by 32%.
Deere expects the construction equipment business to continue to outperform in 2014. For the year Deere guided analysts to a 10% increase in 2014 sales for this unit. Unfortunately, Deere said sales at the remainder its business are projected to fall by 6% in 2014. That’s not surprising since Deere projects industry sales of farm equipment will drop by 5% to 10% in North America, by 5% in the European Union, and by 5% to 10% in South America. Industry sales in Asia will be up slightly, Deere projects.
This slightly negative appraisal—only slightly negative, I’d say, because 2013 was a record year for farm incomes—has been echoed by other companies in the agriculture sector. Read more
U.S. corn and soybean crops are on track to be so large for the 2013-2014 harvest year that farm income will climb 8.6% to $131 billion from the $121 billion forecast in August even though grain prices have declined, according to the U.S. Department of Agriculture. That new projection is a 15% increase from the 2012-2013 harvest year.
U.S. farmers are projected to produce a record 14 billion bushels of corn this harvest year and 3.6 billion bushels of soybeans. (That would be the third largest soybean harvest on record.) Corn prices on the Chicago Board of Trade are down 39% this year.
The higher than expected farm income is good news for companies that sell to farmers, which have been forecasting slower sales in 2014 on lower grain prices. Read more