This past week, John Deere (DE) reported stronger than expected first-quarter earnings of $1.30 per share versus the $1.23 that Wall Street expected. The stock sold off 5% on the news in large part because as earnings beat the street's expectations, sales grew at a tepid 8%. Though analysts saw this as a cause for concern, the stock still delivered strong earnings. The results are as follows:
These earnings point to DE's strength, but they do not tell the whole story because what is most important for the long-term vision of this company is the reinvestment that DE is planning. These results are being delivered without the eight factories that are planned for the next few years and without DE coming into new markets with its products.This has the ability to set DE apart from its largest rival Caterpillar (CAT) in the long-term due to the company's commitment to reinvesting in its future. Samuel R. Allen, DE CEO and Chairman, states:
By completing another quarter of record performance, John Deere has started 2012 on a strong note. These results are evidence of the skillful execution of our operating and marketing plans. They also reflect an enthusiastic response by customers worldwide to our advanced lines of equipment. Maintaining such a high level of execution is especially noteworthy as we move ahead with major new-product launches and significantly expand our global market presence.
The combination of DE's long-term growth strategy, past record, commitment to shareholders, and financial strength makes DE a company poised for long-term vitality. Even if the company experiences some short-term hurdles in commodity prices or economic variances, DE reinvestment into its future will pay off in the future and set it apart from its largest competitors.
Why DE is poised for long-term vitality:
What is most impressive about DE is its apparent commitment to reinvesting in its future and allowing its products to reach as many countries and demographics as possible. The company's plans can be seen in the visual representation below. These tangible reinvestments will help prepare DE for a future where globalization will drive its business. Through DE is modernizing its current plants and building new ones, DE is positioning itself for long-term vitality.
What sparked fear in Wall Street about the company's earnings were its sales results. The 8% increase in total sales was not as high as expected, but the company still kept in place its 15% total sales growth it expects in 2012. From a long-term investment perspective, DE is putting massive amounts of cash into reinvestment into its infrastructure (above) and this is what will drive sales into the coming years. Though these results may not have been strong enough for Wall Street in the short-term, these are by no means poor results or poor expectations for 2012. Investors should pay notice to the company's sales growth in the coming quarters, but should not lose sight of the long-term vitality of the company and its future prospects.
(John Deere First Quarter 2012 Earnings Conference Call)
Commitment to stockholders:
DE is by no means considered a high-yielding stock, but the company has maintained over the past few years and continued into today a strategy for rewarding investors for their investment. The key to any company's success is to have a clear-cut, nimble, and exercisable strategy that can yield results into the future. DE has demonstrated this commitment through its repurchasing program as well as its dividend of 2%. The graphic below illustrates the clear-cut and deliberate strategy of DE into the future.
- Forward price/Earnings Ratio: 10.0. This PE ratio puts the company in line with its competitors and does not point to an excessive valuation.
- PEG Ratio: .99. This PEG ratio illustrates that the company's valuation (in the context of its growth) is not high and is within a reasonable range.
- Cash-Debt: -$24.88 billion. Although this is a high debt level, the company has a strong income flow and in the context of its current financials does not prove to be excessive.
- Return on Equity: 42.32%. This ROE is very impressive because it speaks to the company's ability to utilize its capital. With the current expectation for growth that De has, this gives tangible evidence for the ability the company has to utilize its capital efficiently.
Conclusion: DE is a company planning for the future and a globalizing world. Due to the company's commitment to reinvesting in its future, the company's growth prospects, the company's clear strategy, and sound financials, DE is in a position to thrive over the coming decade. Though the company may have short-term hurdles to jump, its long-term integrity remains intact.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.