Deere's (DE) stock has been quite volatile in the last four months and is currently trading at a price of $82.28. This trend may continue throughout fiscal year 2013 as Deere's major revenue generating regions, the U.S. and Canada, presented mixed results in its third-quarter earnings report in August 2013. The company's U.S. and Canada markets contributed around 64% of the total revenue last year. Going forward, these major revenue generating areas might not be able to support this volatile stock this fiscal year.
DE data by YCharts
Though the stock is expected to be volatile in the short term, it will receive long-term support from its investment in Brazil. Deere is expected to manufacture high power tractors in Brazil, which will be produced commercially in late 2015. The Brazil operations will generate revenue after two years, and we believe this volatile stock has many hidden facets to discover.
As shown in table below, in August 2013, the company reported mixed results in the sales of its various agricultural segments as compared to industry figures in the U.S. and Canada. The industry's figures outperformed all of Deere's segments, with the exception of the company's row crop tractor sales growth and 'combine' sales.
Agriculture and turf segment
up by double digits, lower than the industry wide sales
Inventory of utility trucks (previous twelve months)
lower than the industry
Row crop tractor sales growth rate
outperformed the industry
Inventory of row crop tractors
(previous twelve months)
lower than the industry
dipped in single digit
Inventory of 'combines' tractors
(previous twelve months)
lower than the industry
These mixed results are expected to decline in this fiscal year. Deere estimated that the U.S. farm revenue will decline this year. Farm revenue is an indicator of agricultural equipment sales. The U.S. farm revenue is expected to decline from $402.1 billion last year to $389.8 billion this year due to weakening crop prices.
With the decline in crop prices, we feel that the purchasing power of farmers will decline. Consequently, the demand for agricultural equipment and machines will decrease. We expect that the decline in demand will hamper the growth of Deere, as it is one of the largest manufacturers of agriculture machines in the U.S. and Canada.
In fiscal year 2012, the revenue from the U.S. and Canada market increased 20%, and for the full fiscal year 2013, the company has lowered its guidance of growth in revenue to 5%. This implies that Deere's stock will continue its volatility for the short term, as the U.S. and Canada's combined agriculture equipment sales account for the majority of the company's revenue generation.
In a bid to meet the growing demand for high power tractors from Brazil, Deere is expected to invest around $40 million to manufacture high power tractors, or 8R, in the region. The company announced on Sep. 9, 2013 that it will reconfigure its facility in Montenegro, Brazil, to manufacture these tractors. Currently, the company manufactures 5R, 6R, and 7R tractor series in its Montenegro facility.
The 8R model is expected to be eligible for FINAME financing, which is a program accredited by the Brazilian Development Bank for the economic development of Brazil. Under this financing program, those who buy 8R will be able to purchase it at a lower rate of interest. We believe this will attract more buyers towards the 8R model. Deere expects that the production of the 8R model will increase productivity for farmers and reduce fuel consumption.
The reconfiguration of the Montenegro facility for the production of 8R tractors will begin by the end of this year and the production of these tractors in Brazil is expected to begin by the late fall of 2015. So, we expect the production of 8R tractors will be a long-term benefit.
Deere's major rival, AGCO Corporation (AGCO), is also expanding globally. AGCO Corporation announced on Sep 17, 2013, that it entered into a joint venture with Russian Machines to manufacture agricultural equipment and replacement parts in Russia. As per the joint venture, AGCO Corporation and Russian Machines together, are expected to invest approximately $100 million in the joint venture over the next three years. AGCO Corporation is expected to introduce its high technology products in Russia, while Russian Machines is expected to provide production facilities and support from local government to AGCO Corporation.
Together, the companies will build a new plant covering an area of 27,000 square meters near Moscow. This plant is a production facility that will manufacture agriculture equipment. This joint venture is a significant growth strategy of AGCO Corporation, positioning it to grow in the burgeoning Russian agriculture market. The total grain production in Russia is expected to increase by 21% to 86 million metric tons this year. If we assume this growth rate to be constant for next year, the crop production is expected to reach 104.06 million metric tons. As the operations of the joint venture are expected to start next year, it will be able to grow with Russian crop production levels.
Deere announced on Sep 26, 2013, that it will pay a dividend of $0.51 per share on November 01, 2013. This is a growth of 10.86% from last year's figure. At the current stock price of $82.28, the dividend yield of Deere is 2.50%. The past five years' historical dividend yield has ranged from 1.28% to 4.39%, with an average of 2.14%. The current dividend yield is higher than this average value. This makes the company's stock attractive.
Another player in the farm and construction machinery industry, Joy Global (JOY), chose a different path to attract investor's attention by announcing a repurchase program in its third-quarter report of 2013. Joy Global's stock price is currently trading very low compared with its stock price a year ago. To enhance its stock price in the future, Joy Global announced a share repurchase program of $1 billion to be purchased over the next 36 months. Assuming that Joy Global will repurchase the shares at a constant rate over the next 36 months, then for the next 12 months the company is expected to buy back shares for $333.33 million. In 2012, the company's net income was $762 million with earnings per share, or EPS, of $7.13, resulting in 106.87 million outstanding shares.
If we consider that Joy Global will repurchase the shares at the current market price of $51.04, it will result in repurchase of 6.53 million outstanding shares. After the repurchase program, 100.34 million outstanding shares will remain in the market. Suppose net income is constant for the next fiscal year, EPS will rise to $7.59, which is a growth of 6.45% from the EPS of last fiscal year. Although the repurchase program is an attempt to increase the share price, this low EPS growth is not expected to significantly bounce Joy Global's stock price.
Deere's stock valuation also shows mixed results. Deere's trailing 12-months price-to-earnings, or P/E, ratio is 9.34, lower than its forward P/E of 10.18. This signifies that the company's earnings are not expected to rise going forward. On the other hand, the price-to-book, or P/B, ratio of 3.66 favors the stock, as it's lower than the industry's P/B ratio, and lower P/B ratio is considered better. The company's long dividend history also favors the stock. Deere's current dividend yield is 2.50%, higher than the industry's dividend yield of 1.91%.
The stock valuation and fundamentals indicate its current volatility. However, in the long term Deere provides a good investment option. Investors who are currently holding a position in Deere should continue holding their position and consider Deere a long-term investing option.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.