Deere & Co. expects a decline, but most analysts say Hold or even Buy

Deere & Co. tractor
Deere & Co.'s tractor in U.K. forest. Màrtainn MacDhòmhnaill

By Alison Martin

Deere & Co., producer of the iconic green-and-yellow tractor brand John Deere, recently warned investors to expect sales declines by 7 percent in 2016–but most analysts are still telling investors to hold onto their stock.

The company’s sales remain tethered to the ever-changing agriculture industry, which faces a number of problems. The yearly demand for agricultural products, soil conditions, weather conditions and the non-food uses for some crops (think ethanol), among others, can have favorable or adverse affects on the company’s net income.

John Deere Capital Corp., the finance subsidiary that assist farmers with loans needed to buy Deere equipment, may also face trouble in the upcoming year. As dips in the agricultural industry occur, more loan defaults as well as rising interest rates could impair the company’s net income. The Federal Reserve’s December hike in its key interest rate could affect whether farmers purchase equipment, and the Fed may raise rates further in 2016.

Last August Deere’s stock dropped dramatically over nine days, starting at $94.34 per share on Aug. 14 and landing at $79.09 on Aug. 25. Part of its decline may have come from the company’s Aug. 15 announcement to lay off 600 workers at plants in Illinois, Iowa and Kansas.

Deere & Co Monthly Stock Prices, 2014-2016

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Graph: Deere & Co’s stock suffered several drops over the last two years. (Alison Martin/MEDILL)

Though the stock made a slight recovery over the next few days, it dropped once more on Oct.1, reaching its lowest point at $72.89. Today the stock still hovers around $72.

According to the company’s most recent 10-K filing in November, quarterly net income was $351.2 million or $1.08 per diluted share, down 46 percent from the 2014 quarter net income of $649.2 million or $1.83 per diluted share.

In a press release Deere estimated a 7 percent decline in sales in fiscal 2016, and earnings of “approximately $1.4 billion.” The company said a “weakness in global markets for farm and construction equipment leads a to decline in sales and earnings for the quarter and full year.”

“Although our forecast calls for lower results in the year ahead, the outlook represents a level of performance that is considerably better than we have experienced in previous downturns,” Chairman and CEO Samuel R. Allen said in the press release. “This shows the continuing success of our efforts to establish a more durable business model and a wider range of revenue sources.”

In addition to agriculture and turf equipment, Deere produces construction and forestry equipment. Analyst Matt Arnold at Edward D. Jones & Co. LP believes these two ventures may be enough to prop up declining agriculture equipment sales. It should be noted, however, that Deere expects a 5 percent decline in its construction and forestry division.

Despite the gloom, most analysts are telling investors to buy or to hold onto their stock, while at the same time an unusual number of analysts  recommend selling. Of 26 analysts tallied by Bloomberg, six say sell, balanced by six who say buy.

“We give Deere credit for operating well in a challenging time,” analyst Lawrence De Maria of William Blair & Co. said in  note, “but believe that there is little reason for optimism in the next couple of years and that next year may be set up for disappointment. Ultimately, we still believe it is too early to get excited about farm equipment stocks as we enter the third year of a downturn in North America following a super cycle that occurred for the prior decade or so.”

Not all analysts agree. Arnold of Edward D. Jones isn’t ready to sell just yet.

“I think they [analysts] are looking at it on a too short-term of a base on farm fundamentals being weak,” he said.

Arnold still has high hopes for Deere stock and recommends buying it.

“We think the stock can start to act better especially if it becomes apparent that farm fundamentals are near trough,” he said.

Despite analyst concerns, CEO Allen remains positive, asserting that the company’s future is secure.

“All in all,” he said, “we have confidence in the company’s present direction and firmly believe it is on track to deliver significant value to our customers and investors in the years to come.”

Photo at the top: A Deere forestry tractor at work in the U.K.  (Màrtainn MacDhòmhnaill/Creative Commons license via Flickr)