The agro equipment giant, Deere & Co. (DE, Financial), is going through the toughest of times as crop prices are at all-time lows, and this has been taking a toll on equipment purchases at its home turf. Also the company has been witnessing continued decline in top and bottom lines for the previous few quarters. Soon after the USDA confirmed the mounting pressure on commodity prices early this year, Deere’s management opted to take a cautious stand in terms of their forward sales guidance for the fiscal year. Under such a scenario, shareholders are tensed on whether they should be holding the stock for a long-term. Let’s take a closer look at Deere’s financial playbook to get to the final answer.
Stock price and earnings indicator
Deere has been facing its own set of problems lately in the past four months and has fallen approximately 12% since this May. The stock is roughly flat over the past twelve months. Just a few months ago, Deere’s stock price was at the peak and the shares had reached $95 in May. Also from the chart below it can be estimated that Deere has a strong support at around $80 and faces strong resistance at around $91 to $92.
Soon after the company reported two consecutive disappointing quarter earnings, and with analysts forecasting lower top and bottom line for the pursuant quarters – the stock has just slid downwards since May.
The short term outlook of the company might not look inspiring. Sales hit $35 billion last year and are expected to be down by 6% to $32.8 billion this year. Also, as the crop prices are expected to remain low till next year, sales for Deere are estimated to drop to $30.7 billion by fiscal 2015. Last year the earnings stood at $9.09 per share, whereas analysts predict that this year Deere’s earnings would hover around $8.37 per share and for the next fiscal year it’s projected to be close to $6.83. This means that earnings are likely to exhibit a 25% decline in two years. The major factors contributing to such a dramatic decrease in earnings are the ugly revenue numbers which are on down trends due to lowered demand for Deere’s farm equipment.
Despite the decline in EPS expected in each of the next two years, analysts still predict that Deere will grow its earnings by an annual rate of 4.5% over the coming five years. So, although Deere is not much of a growth story at this point of time, investors with a long-term view can anticipate modest earnings growth down the road.
Dividend payout remains firm
Though Deere posted really disappointing numbers in the past two quarters, it also announced an 18% increase in dividends in May this year. As depicted in the chart above, dividend payout has been set as one of the company’s top priorities since 2010 when it revised the dividend policy to add to an investor’s smile.
While earnings are expected to drop year on year for Deere, analysts are hoping to see a dividend payout of 35% in 2015 from the company perspective. The regular dividend payout policy of the company creates a significant margin of security for the worried investors and allows for potential for further dividend increase in the near future. Deere is also on track to return an additional $2 billion to investors in the form of share buyback in 2014.
Also to be noted is the ability of the company to generate positive free cash flow, irrespective of the decline seen in both its top and bottom lines. Indeed, the brisk restructuring program adopted by Deere is aiding in such continued cash flow generation. The chart above shows the consistency in the cash flow generation which is expected to continue in the forthcoming years as well for Deere.
The long-term perspective
Deere might not seem to be a prospective stock if investors are opting to hold it for a short term. But the company knows how to create a tight rein on its costs to ultimately generate cash to reward its investors. This clearly indicates that Deere is a stock meant for long term investors. Also analysts feel that the stock is promising in the long-term. Investors should not panic as these cyclical downturns are only temporary in nature and should keep invested in Deere to make future profits.
