John Deere Earnings Preview: Trolling For Underperformers In 2013

Nov.19.13 | About: Deere & (DE)

John Deere (NYSE:DE) reports their fiscal 4th quarter, 2013 before the opening bell on Wednesday, November 20, 2013.

Analyst consensus is looking for $1.89 in earnings per share (NYSEARCA:EPS) on $8.677 billion in revenues for expected year-over-year growth of 9% in EPS, on a decline of 11% in revenues.

DE is flat in terms of its 1-year return, and year-to-date, the stock is down about the same, in the area of 1% - 2%, excluding the dividend.

For fiscal 2014, which ends October '14, and for which DE management will give guidance on the call, analyst consensus is looking for $34.44 billion in revenues to generate $7.98 in EPS for expected year-over-year declines of 2% and 10% respectively.

2014 is expected to be the first year of negative EPS growth for DE since 2009.

One of the problems could be the price of corn, which, according to the CME December '13 futures price contract, has traded down from $6.60 (on the chart) in late 2012, nearing its yearly low at $4.11 today.

While the farmer remains flush with cash, and thus ready to buy equipment, the 30% drop in the price of corn, from strong supply, has to be weighing on DE's forward EPS and revenue estimates. (The flip side to that is the drop in the corn futures has resulted in some additional demand from non US consumers.) Per one sell-side report, the US and China account for roughly 40% of the global harvested corn acreage. (Soybean prices, per the CME Soybean chart, has been flat for the same period that corn has declined 33%. The Jan '14 soybean price is roughly $12.78 per bushel.)

Another issue is the Construction and Forestry (C&F) division, which saw revenues decline 11% in the quarter. C&F represents about 15% of DE's total revenues but the contribution to operating income has been shrinking.

The valuation on DE is much more reasonable today than when it was trading at $95 in early '13 and 21(x) cash-flow with no free-cash being generated.

Today DE is trading at 11(x) cash-flow with some free-cash-flow being generated, although it is still small.

If corn is expected to trough at $4, and China demand improves, it could be the bottom for the stock. The hard part now is to guess at "trough EPS" which some think is $6.50 - $7 per share, versus the current $7.98 consensus for fiscal 2014.

DE key valuation metrics:

2014 est EPS growth:-10%

2015 est EPS growth:-2%

2014 est Rev growth:-2%

2015 est Rev growth: 0%

P/E '14: 10(x)

P/E '15: 11(x)

Div yld: +2.60%

Price to C/Flow: 11(x)

Price to Rev's: 0.90(x)

Frankly, I'd love to see DE lower guidance on Wednesday morning, crush the stock into the mid $70's, reset the expectations bar, and then we'd want to own the shares.

I'm waiting for one last flush in the stock, and more bad news, but that is always a risky game.

Our internal valuation model puts in intrinsic value on DE of $75, while Morningstar puts an intrinsic value on DE of $87, so the stock is thought to be fairly valued today.

Downward pressure remains in the 2014 EPS and revenue estimates.

We're going to wait and see what management guides to 2014 on the call, and see how the stock price reacts. I'd love to own the stock in the $70's for a longer period of time, and preferably the low $70's.

DE has dramatically underperformed the SP 500 in 2013 as well as in 2012, although the difference in outperformance was far more dramatic in 2013, almost 2500 bp's.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.