Deere Reduces Its Earnings Outlook

| About: Deere & (DE)


Deere reported higher than expected EPS for Q1 FY2016.

But the company also revised down its outlook on revenue and earnings for 2016.

Is its current valuation attractive?

Shares of Deere & Company (NYSE:DE) fell down following the release of the recent earnings for Q1 of FY2016. The company's earnings per share for the quarter were $0.8 - a bit higher than the market consensus of $0.71 per share - but the company also reduced again its outlook for the year; this news dragged down the company's stock. Even after considering the recent fall in its stock, the company's valuation remains elevated compared to its peers and the industry.

While the company reported lower revenue and earnings in the past quarter - which was expected considering low commodities prices and softer demand for Deere's equipment -- the main takeaway was its revised down outlook for the year: Revenue are expected to be fall by 10% instead of 7%, year on year; this will bring its expected revenue to $25.97 billion - back in FY2015 revenue was $28.863 billion. Moreover, expected earnings were also revised from $1.4 billion to $1.3 billion - a 7% fall from the last estimate. A closer look reveals that the company's lower outlook is due to sharper fall in its agriculture and turf segment, which is three quarters of its net sales: From 8% fall to 10%. The impact of unfavorable currency was doubled from 2% to 4%. Also revenue from construction and forestry segment will decline by 11% with a 2% adverse effect of currency -- back in the previous earnings report, the company expected only a 5% fall in sales and a 1% negative currency-translation impact.

The reaction in the markets seems harsh as DE lost more than 4% of its value following this release. But a closer look reveals that at least in terms of forward P/E the company's valuation hasn't dropped, as you can see in the following table.

Source: DE and Author's calculation

Based on these figures, the company's forward P/E is still slightly up compared to its level before the downward revision to the annual earnings. At face value, this could suggest some investors are still optimistic about the company's outlook. Investors also consider its dividend payment, which stands on an annual yield of 3.1%, and provides some return until DE starts climbing back again. But this company, which has an EV/EBITDA of 15.3, still seems elevated compared to the industry - Machinery's EV/EBITDA ratio is 9.6 - or another heavy machinery manufacturer such as Caterpillar (NYSE:CAT) - its ratio is 9.75.

This valuation suggests investors still place a high price for this company even though it faces weaker demand for its equipment in major markets and growing concerns for an economic slowdown. In Brazil, the situation isn't improving: The IMF recently revised down the country's GDP outlook for this year from -1% to -3.5%. For next year the outlook was slashed by 2.3% to 0% growth. But slower growth isn't solely attributed to emerging markets: Even in the U.S. the outlook was revised down by 0.2% to 2.6% for 2016 and 2017. The only silver lining is that if the U.S. does grow at a slower pace, the Fed may consider to hold off any future rate hikes and perhaps even slash rates down the line. This could weaken the U.S. dollar, which will curtail the adverse impact a stronger dollar has on DE's earnings.

In conclusion…

Deere is a strong company that could withstand the current harsh conditions. But the outlook remains grim and we could see additional downward revisions if the rising concerns to a slower global growth materialize. And the company's valuation isn't too attractive for the industry. Therefore I still think at this price the stock isn't much of a bargain. For more please see: Is It Time To Consider Buying Deere Again?

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.

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Tagged: , Farm & Construction Machinery, Earnings
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