On Wednesday Warren Buffett's Berkshire Hathaway (BRK.A), (BRK.B) disclosed several adjustments to each of its portfolios. These portfolio adjustments as of September 30th included the establishment of a stake of 3.98 million shares in Deere & Co. (DE) as well as several other additions and subtractions. In my opinion there several positive and negative catalysts potential investors should examine a bit further when it comes to Deere & Co. before establishing a position in the company.
Deere & Co. which is based in Moline, Illinois, currently has a P/E ratio of 11.31 and a forward yield of 2.10% ($1.84). On Tuesday, November 13th it was noted by Paul Whitfield that, "dry weather is expected to help Deere. The reduction in grain supplies lifts prices, giving farmers more money for new equipment." Such dry weather could in fact boost revenues for the company, which would be the much needed improvement shareholders have been looking for since the 14% miss in earnings the company announced last quarter.
The Positive Catalysts
The company's fourth quarter outlook and relatively cheap share price aren't the only two catalysts long-term investors should consider. In fact, there are also two ancillary variables long-term investors may want to keep in the back of their minds before establishing a position.
The first ancillary variable to consider is the fact the company had surpassed earnings estimates by an average of 7.10% in three of the four previous quarters (leading up to last quarter's miss). In my opinion there were several isolated issues the company had experienced during the quarter that were directly affected by poor management decisions and even poorer execution. That being said I strongly believe the company's issues in terms of execution have been resolved and therefore a case can be made to consider the quarter itself an anomaly when comparing to the previous three.
The second, and probably one of the more important ancillary variables to consider, is the company's recent sales performance, especially when it comes to 4-Wheel Drive vehicles. According to Todd Campbell, a fellow contributor here at Seeking Alpha, "In Deere's most recent sales update, the company indicated sales were brisk for 4WD tractors and combines, with units sold outpacing industry growth of 11% and 22% in September, respectively. Across the entire industry, year-to-date U.S. farm tractor unit sales are 7.7% above 2011, led by 8.4% growth in more margin friendly 4WD models." If the company can continue to not only demonstrate strong sales but outpace many of their competitors in the process, I see no reason why a position should not be established at these levels.
The Negative Catalysts
On the flip side of things, I think there are two negative catalysts to consider in terms of Deere & Co. First and foremost is the question of execution. The first thing to consider is what if the company runs into similar management and execution issues as was the case last quarter? If the company runs into similar management issues in any of the upcoming quarters, it may in fact need to consider drastic management changes so such obstacles don't become a regular occurrence. The second thing to consider is weather. Not only would the notion of a drought in the Midwest play a key role in the suppression of growth, but so would a hurricane. For example, Hurricane Sandy, which recently ripped through most of the Northeast, has affected many of the company's dealerships in the NY/NJ/CT region and has also had a serious impact on the growth outlook for such direct competitors as Caterpillar (CAT).
For potential investors looking to establish a position in Deere & Co. the company's most recent quarter should be considered an anomaly and not a major factor in the decision to establish a longer-term position. With growth expectations of 17.20% for the year and a current of 2.10%, I think Deere & Co. should be considered a good bet from both a growth and income perspective.