Seeking Alpha
Growth at reasonable price, healthcare, long-term horizon, value
Profile| Send Message|
( followers)  

Deere (NYSE:DE) caught my attention with its recent announcement of an increase to their share buyback program. I view share buybacks to be an excellent tool, adept management teams can employ to reward shareholders. Yet, not all buybacks are done correctly as they ultimately fail to reduce the number of shares outstanding. Too often, management will announce a buyback to absorb shares newly created via option grants. Two examples of companies that use share buybacks to reduce the share float are IBM and Northrop Grumman (NYSE:NOC).

Deere's recent announcement of an additional $8 billion dollar buyback caught my attention. The amount works out to approximately 25% of all the shares remaining in DE. The article below will discuss the potential positive implications of this announcement for shareholders.

Deere is the largest farm equipment manufacturer renowned the world over. DE also produces a range of construction and mining equipment to augment their overall sales. Due to the nature of the products Deere produces, the company is best classified as a cyclical company whose earnings are due for exaggerated price swings.

Year

2004

2005

2006

2007

2008

2009

2010

2011

2012

Revenue in millions

17,673

19,401

19,884

21,489

25,804

20,756

23,573

29,466

33,501

Dividends per share

0.53

0.61

0.78

0.91

1.06

1.12

1.16

1.52

1.79

Earnings per share

2.74

2.94

3.08

4.00

4.70

2.82

4.35

6.63

7.63

Shares outstanding in millions

493.72

473.74

454.47

439.64

422.3

423.24

422.18

406.07

387.81

Deere reported record earnings for 2013, coming in at $9.09 per share with 378.8 million shares outstanding. Deere had a banner year, which I believe will serve as a cyclical top for the next few years. Deere expects the sale of agricultural machinery in the US and Canada to be down in the 5-10% range, with the EU sales projected to be down 5% as well. Agricultural sales make up the bulk of DE sales and profitability so it shouldn't come as a surprise that earnings projections for 2014 are lower than those achieved in 2013.

Post earnings, the amount of earnings revisions were swift with S&P expecting earnings for 2014 to come in at $8.55 and Credit Suisse checked in at $8.65. The cyclicality of the industry has reared its ugly head causing profits to come down. Here is where Deere management can provided excellent value by employing an aggressive share reduction plan. Companies that exhibit year over year earnings decline tend to be assigned a low to single digit p/e multiply due to lack of growth. The low P/E valuation allows a shrewd management team to take advantage of the market's myopia and position the company and its shareholders to reap outsized gains for many years.

The problem with the announcement of the buyback is in my view the tone, ""Today's action reflects our confidence in the company's long-term future growth opportunities," said Samuel R. Allen, chairman and chief executive officer."The decision announced today exemplifies our commitment to creating superior long-term value for investors."

The repurchase program will supplement the existing $5 billion share authorization announced in May 2008. On October 31, 2013, there was approximately $1 billion remaining under the prior authorization. Repurchases will be made at the company's discretion in the open market. Deere had approximately 375 million shares outstanding on October 31, 2013." My take away is, we play on buying back shares to support the stock price here as we enter into a profit decline.

I would have preferred a more aggressive stance such as this one announced by NOC, "FALLS CHURCH, Va., May 16, 2013 /PRNewswire-FirstCall/ -- Northrop Grumman Corporation (NOC) announced today that its board of directors has authorized an additional $4 billion for the repurchase of the company's common stock. With today's authorization, the company's outstanding share repurchase authorizations total approximately $5 billion. Northrop Grumman currently plans to repurchase shares with the goal of retiring approximately 25 percent of its shares outstanding by the end of 2015, market conditions permitting. Share purchases will take place from time to time, subject to market conditions and management's discretion, in the open market or in privately negotiated transactions. As of March 31, 2013, Northrop Grumman had approximately 235 million shares outstanding.

NOC faced a similar predicament as DE, with sales and earnings growth flat lining due to lack of funding from Congress. The only thing that didn't flat line was the securities price as we can see from the chart below, NOC has significantly outperformed the overall market.

Deere is a well run company, with a very astute management team. I am intrigued by the potential for capital gains and income that Deere can offer. I will hold off on initiating a position at this time. I believe we will see the shares come back down into the high 70's low 80 ranges. At that point I would be happy be buy in. Thank you for reading and I look forward to your comments.

Source: Is Deere & Company A Buy At Its Current Level?

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.