The farm equipment giant Deere (DE, Financial) reported relatively soft results for the third quarter 2014 due to weakening demand and restraining condition in a global farm sector that is taking a toll on its financials. However, its results were powered by the improving demand, coupled with higher shipment volumes or prize realization in the other business partitions such as construction & forestry and financial services, where its net sales were up about 19% and 8% respectively.
The company, for the third-quarter, reported revenue of $9.5 billion, a drop of approximately 5% as compared to $10.01 billion in the same quarter a year ago. Its net income for the quarter came in at $850.7 million or earnings of $2.33 per share, a dip of about 15% as against $996.5 million or earnings of $2.56 per share in the corresponding period last year. However, its top and bottom line performances were better than the analysts had expected. The analysts were modeling net income of $812 million on the revenue of $8.72 billion for the third-quarter 2014.
The world largest seller of farm machinery has lowered down its full year forecasts. Deere now expects its full year sales to go down by 6%, down 2% from the earlier guidance of 4% drop in sales, while its bottom line has been amended to $3.3 billion from earlier forecasts of $3.3 billion. Deer also expects its fourth quarter sales to drop approximately 8% year-on-year basis due to slowdown in its global farm sector.
Can Deere run again?
Despite not so friendly environment for its agriculture and turf business, the company is executing various initiatives such as free warranty coverage for large late model tractors across United States and Canada, initiating sales incentives for rising inventories for used tractors and plans to lay off approximately 600 factory employees to resurrect its agriculture equipment production that could ease out its declining sales for the category in the upcoming quarter.
Meanwhile, Samuel Allen CEO of Deere also said that the company will align its production capacity with the on-market demand for its agriculture products worldwide in order to escape oversupply and low price for its equipment in the remaining quarter that should certainly compensate its dwindling sales in Ag Category.
Deere is also expected to benefit from the positive signs of economic stabilization in Europe, where GDP is assumed to get accelerated slightly in fiscal 2015 providing a sense of relief for consumers and business owners that are leading to augmented exports. The company expects the grain and soybean production to pick up the pace along with livestock that are forecasted to touch the peak in 2014 in the United States. Also, the global demand for oil seed and global grain remains relatively strong which should increase demand for the company’s farm equipment going forward.
Some positives
Additionally, its construction and forestry segment continue to gain traction in the market due to augmented volume and better price realization. Also, the increased hiring in construction segment is leading to ramp up production in the housing and building development and home sales now looks at a better position should drive growth for its construction and forestry equipment. In addition, the company is experiencing strong momentum in the energy sector that could certainly guide approximately 10% rise in its forestry sales for the year.
Moreover, the company is witnessing strong booking orders for its construction and forestry segment due to increased shipment coupled with positive signs of improving U.S economy where the sales for forestry market are expected to increase by 10% and Europe and Russia that are now expected to generate positive sales for construction and forestry segment. These factors in combine highlight strong outlook for its construction and forestry segment in the coming years.
Apart from this, Deere is executing some strategic moves for clearing its inventory such as John Deere Certified Pre-Owned Program that has been recently launched and is expected to help the dealers in minimizing of used equipment. This program will also help the company in selling out its equipment effectively to the farmers around the world.
Conclusion
Deere is fighting back with couple of effective strategies such as scaling back its production in order to streamline its supply with low price and is continuously increasing its presence across the world that should certainly generate positive margins for the company going forward. Deere is currently trading at the trailing P/E multiple of 9.16 and forward P/E multiple of 12.27 that shares cheap valuations for the stock that has tremendous growth prospects in the future as its PEG ratio stands at 2.23 for next five years.
So, investors can certainly pick the stock as it is said to be growing at the compounding growth rate of 4.50% for the next five years. Moreover, the company is fairly evaluated at the performance and wealth matrixes. Its profit and operating yields for the trailing twelve months are 9.08% and 14.11% respectively while its return to equity yield remains quite strong at 34.19% for trailing twelve months. Its total outstanding debt is $36.86 billion, which is well mix by most measures and has operating cash flow of 3.35 billion.
