After announcing its quarterly earnings, Deere & Company (DE) saw its market value plunge by nearly 7%. The culprit was Deere's reduced outlook for the rest of the year, even though the company saw a lot of upside in 2013. At the end of the last quarter, the company announced that it expected to make a profit of $3.35 billion for the year. Now, this guidance is reduced down to $3.29 billion, a decline of nearly 2%. The company expects to do really well in 2013, as farmers hit by the draught will be looking to replace their older machinery with more efficient ones in order to maximize their output.
Deere blamed higher material costs and lower demand in Europe for its quarterly profit, which was up 11% compared to the same period last year. The company's management seems to believe that the draught in the Midwest played a very little role in the company's quarterly profits. The company's revenue for the quarter was just short of analyst expectations, as analysts expected revenue of $9.61 billion, and the company generated $9.59 billion of revenue. Part of the blame was placed on canceled product orders by farmers.
Deere's management believes that farmers are enjoying one of their golden eras at the moment, as crop output, coupled with money from crop insurance, allows them financial stability. The company's chief economist, J.B. Penn, commented on the situation by saying: "The financial health of the farm sector is as strong as it's been in modern times."
In the future, food prices and government subsidies are likely to increase as the world population keeps growing and nations keep getting wealthier. The demand for food products will increase exponentially in the next couple decades. Companies like Deere are likely to benefit from this trend, as farmers will be able to replace their older machinery with newer, better and more efficient ones in order to maximize their output and profits. While the company didn't beat analyst estimates, it continues to be a major player in the farming industry, with strong financials. The company continues to be a great investment for long-term investors.
In 2013, analysts expect the company to earn between $8.1 and $9.5 per share, with the average estimate being $8.68. The company ended the quarter with cash and equivalents of $3.40 billion. Given the company's double-digit annual growth rate, the company could easily support a P/E ratio of 13, giving it a price target between $105 and $123 by the end of 2013.
The company will pay 46 cents per share in quarterly dividends. This is in line with the dividend payment of the last quarter. The company's dividend rate has increased by more than 300% in the last decade and 64% since 2010. If the past trend is a good predictor of future trends, the dividend rate of Deere will continue to increase at a decent rate. Currently, the company's dividend yield is 2.45%. In addition, the company has repurchased nearly 16 million shares, totaling $1.2 billion so far in this fiscal year. Last year, the company repurchased more than 20 million shares and it is committed to repurchase more shares in the future in order to create value for its investors.
The biggest issue facing Deere is the company's high debt level. The company's short-term debt totals $7.04 billion and long-term debt totals $21.16 billion. The good news is that a significant part of this debt belongs to the financial services department of the company and this department has a very low credit loss rate. The company expects a credit loss rate of 0.0% for 2012, which is a historically low number. The financial department of Deere issues credit for farmers wanting to buy its equipment, but are short of cash at the time of purchase. The figure below was taken directly from the company's presentation slides for the earnings conference yesterday.
In conclusion, Deere's long-term investors should not be worried. The company is in a good shape and will continue to be so for the foreseeable future. Deere is one of the major companies to benefit from the boom in food prices, which is expected to continue for multiple decades as the world population keeps increasing and poorer nations get richer, increasing demand exponentially.
Disclosure: I am long DE.