Deere: Make No Mistake

| About: Deere & (DE)

Summary

Deere & Co. Stock has been flat for months overall, favorable for traders but frustrating for investors.

Fiscal Q1 earnings are out and I discuss the critical metrics.

Make no mistake, I would rather miss the first few points of a true turn-around fundamentally, than to bottom-fish and time the market incorrectly.

Well as you are likely familiar as a reader, just about everyone is familiar with the products made by Deere & Co. (NYSE:DE). Once again the company has put out another so-so quarter and this morning I was asked about my take on the name. Truthfully I have not looked at the name in a few months. When I last covered the name the stock was trading at about $76. Today, the stock has not really moved, up just a $1.80 to $77.80. Essentially this is flat.

Interestingly over the last year it has traded in a 25 point 52 week range, but once again the share price is about where it was the last time I looked at it. So it begs the question once again, exactly what kind of a stock is this? Is it one that should be traded? The range suggests as much. Is it an investment? Long-term the trend has been up like many other long standing American companies. But I want to reiterate that right now, to me, this is a dividend name, yielding north of 3% but it does not mean that there isn't upside growth potential. While there is some pressure fundamentally given crop seasons, weather and of course pricing, despite these issues the company has seen over the past few years, it still makes a massive profit. Let's dig deeper to better understand how 2016 is shaping up.

In its most recent quarter we saw that Deere missed expectations on the top line sales numbers but delivered a beat on the bottom lines. However, what catches your eye immediately is the year-over-year decline in performance. It wasn't so much the decline as it was the magnitude of the decline. Worldwide net sales and revenues decreased by a noticeable 13% year-over year. They came in at $5.525 billion for the company's fiscal first quarter. Of course much of the company's sales are of its agriculture equipment and net sales here were $4.77 billion for the quarter dropping 15% year-over-year from the comparable period last year.

Currency issues accounted for much of the decline but there were organic sales declines. Currency issues hit the equipment operations segment for about 4%. Equipment net sales in the United States and Canada 18%. This is awful, and shows where the company is in its cycle and the impact of what is happening fundamentally in agriculture at this time. International net sales also fell 9% for the quarter, but currency issues hit for 11%. Ouch. Still, these numbers show quite plainly that there are organic sales issues as well as unfavorable currency pain.

One thing that does impress me is that the company has responded to the pressures it is facing by controlling expenses to maintain a profit. For the quarter expenses declined in almost every single category year-over-year. That's a huge win to maintaining profit. Cost of sales were $3.84 billion versus $4.43 billion last year. Research and development fell $14 million to $319.3 million. Selling, general and administrative expenses dropped $$66 million to $592 million, while 'other' expenses bucked the trend, rising $25 million. All in all, the company managed to cut expenses to $5.17 billion from $5.82 billion. That's great, as it helped maintain a profit.

When we combine sales and expenses we see that net income was $254 million, or $0.80 per share, for the first quarter. Of course this is down by a rather large 29% compared with $387 million, or $1.13 per share last year. Despite all of the cost cutting efforts, costs obviously didn't fall enough to offset sales declines and currency pains. Samuel R. Allen, chairman and chief executive officer had this to say:

"John Deere's first-quarter results reflected the continuing impact of the downturn in the global farm economy as well as weakness in construction equipment markets. At the same time, all of Deere's businesses remained solidly profitable, benefiting from the sound execution of our business plans and the success of actions to develop a more responsive cost structure."

So what should you do? Well I would not be a buyer here, and I would not sell the news either. However, projections are spooking some shareholders. Company equipment sales are projected to decrease about 10% for fiscal 2016 and to be down about 8% for the second quarter compared with the same period a year ago. Foreign-currency translation issues should hit the company for about 3% for the full year and second quarter. For fiscal 2016, net income will come in around $1.3 billion. This is somewhat light guidance and the market isn't reacting well. But I would not sell the news. To me the share price is attractive longer-term if and only if we see the economic picture improving. With a 3% yield, I am comfortable with a hold rating given the company is cutting costs heavily. You are getting paid to wait. Make no mistake, I would rather miss the first few points of a true turn-around fundamentally, than to bottom-fish and time the market incorrectly.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.