John Deere (DE, Financial) is arguably the best tractor manufacturer in the world. The stock is down with grain prices, but will certainly rebound when grains go higher. Higher planting and good weather has dampened the price of grains and dampened the price of Deere’s stock. This is an excellent opportunity for the patient, value investor.
There are 315 million shares and the market cap is $24.45 million. The dividend is $2.40 and the dividend yield is 3%. Basic earnings per share were $5.81 in 2015 and the price to earnings ratio is 16.2.
The 2015 sales dropped to $28.863 billion from $36.067 billion. That is called precipitous. Earnings per share are down from $8.71 to $5.81. Sales grew from $22.1 billion in 2006 to $32 billion in 2011. That is called growth.
Of their sales, 65% are derived from the U.S. and Canada and the other 35% around the world. It is a very American based company. Agriculture and Turf accounted for $22.1 billion of sales and Construction and Forestry, $6 billion.
According to the Association of Equipment Manufacturers, total farm wheel sales for the industry was 241,492 units in 2006 and 231,863 in 2015. Sales fell off a cliff when the economy took a dive in 2008 and 2009. Under 40 horsepower tractors, which are primarily used for mowing, was 133,644 in 2006 and 130,456. This segment took it on the chin in 2008/2009. The 40 to 100 horsepower segment sold 83,305 in 2006, then took a dive in 2009 to 57,382, grew with the economy to 67,447 and then 67,080. I would guess that part of the success of this segment is that much is used for cattle. The large tractor over 100 horsepower segment sold 20,831 in 2006, and was barely affected by the economy and sold 26,992 in 2009, grew to 39,807 in 2014 and then fell with grain prices to 30,206.
The asset side of the balance sheet shows: $4.6 billion in cash and securities, $3 billion in accounts receivable, $30 billion in equipment receivables. The liability side shows: $8.4 billion in loans, $4.6 billion in securitized loans, $7.3 billion in accounts payable and $23.8 billion in debt. As Deere finances a lot of its equipment, these arrangements show on the balance sheet. The company still made $3 billion in free cash flow in a bad year. S&P gives the debt an “A” rating. Pretty strong.
Earnings and revenues guidance have been decreased, which is no surprise. Deere recently laid off 120 employees in Moline, Illinois, its headquarters. No doubt, Deere’s future is tied to the price of corn and other grains. This is the second year of low grain prices. Farmers in many regions are losing money for every acre of corn or grain they plant. Global corn acreage has increased by 18% over the last ten years and the strong dollar has not helped American farmers. Corn was $4.40 back in June, but has crashed to $3.47. Corn was close to $8 in 2012. Yikes!
What’s going to drive this stock? Higher grain prices. What will probably drive grains higher? Bad weather. Too much rain, not enough rain, or something along those lines. I do not have an opinion about mowers and other lawn equipment. That is a guess on the overall economy as businesses cut spending on their lawns in a downturn. I also do not have an opinion on forestry. Not an industry that I follow. We own shares for our clients. We also own Case (CNHI, Financial) and Agco (AGCO, Financial). It is a patient value investor story. You wait for some reason for grain prices to go higher. You hope you have bought at the bottom of the cycle and hope you sell at the top. Berkshire Hathaway (BRK.A, BRK.B) seems to agree with this assessment as the company holds 7.2% of Deere’s stock.
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