Is Deere Stronger Than Was Conveyed Through The Third-Quarter Results

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Sep 04, 2014
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The agricultural equipment honcho, Deere (DE, Financial) is under immense pressure as the farming industry is witnessing a downturn in the U.S. for the time being, and there are bleak signals for recovery. Even numbers posted in the third quarter testified that the ag sector is under several headwinds that are taking a toll on Deere’s ag business unit. The revenue and profits in the recently announced third quarter took a severe hit showing a downhill movement of 5% and 15%, respectively year over year.

However, while the quarter numbers reflected the growing pressure on the company financials, one thing still kept the investors happy. It was the ability of the company to generate sufficient cash every year for distribution to stockholders even when the macro-environmental situation was not optimistic. Also the dividend payout ratio is as low as 22%, so it might be good to hold the stock for the dividend payout. Let’s have a sneak peek into what Deere is opting for at this moment to keep its fundamentals firm. Here’s the real story.

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Deere trying to remain well-positioned

Recently just after the third-quarter results were out, Deere’s management proposed to lay off more than 600 workers in the U.S. to adjust ag equipment production as per the current demand. This step was welcomed by the industry which is feeling the heat as companies are being forced to reduce the equipment prices as demand tends to be declining this year.

As the farm sector is maturing globally, it has in turn led to decline in farm equipment demand. This has led to weakening of bottom line for ag companies like Deere. Thus, the company is adopting brisk restructuring program to prevent its top and bottom lines from falling beyond a certain level.

Also, as its financial services and construction and forestry division are picking up, Deere finds the diversification in business lines to its advantage.

The John Deere certified program

To optimize inventory management at dealer locations, Deere has strategized the “John Deere Certified Program” which would help to improve re-sale of used equipment, a move which is a dire requirement at the moment when farmers are holding back from new equipment purchases.

This preowned equipment program could be the “game-changer” that will allow farmers to improve their purchases while crop prices continue to remain feeble.

Under this program, used machinery will be certified by Deere’s technicians to ensure they meet strict quality standards, together with a one-year warranty. This might aid in improving sales which is turning to be a major drag for the company.

Company is financially strong

As the world population keeps exploding, the enormous food demand cannot let agriculture lie low for long; however, it’s a test time for companies when the ag industry faces a cyclical downturn. And if we look at the approach taken by Deere, it’s pretty interesting to note that the operating efficiency has improved manifold since the last down cycle. In fiscal year 2013, Deere avoided the $8.5 billion in work capital compared to 2008 and maintained its 2013 receivable level as per 2008 even after the sales clearly tripled in 2013.

Such solid measures incorporated by Deere has been the key behind the expectation of generating $3.7 billion cash from operations in fiscal 2014 which is far above $1.4 billion generated in fiscal 2009 when it was at the previous cyclical low. However, as the ag industry is drastically hit and is showing almost no signs of instant recovery, the management has modified their hopes from $4 billion forecasted in May this year.

Deere also has a strong share buy-back background. In December 2013, the board approved an $8 billion share buyback program and within the first three quarters of the fiscal year, it has bought back 18.4 million shares for $1.6 billion.

Concluding thoughts

Truly the weakness in the ag sector will weigh on both Deere’s top and bottom line for the next couple of years. But the company is devising firm strategies to combat the headwinds and support its bottom line. Indeed Deere looks focused on deriving growth and is well-equipped to fight such short-term challenges. So, it can be concluded that Deere knows how to reach the finish line of the victory stand even if there are active forces playing games with its financial core.