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Deere & Company (NYSE: DE ) is set to report fourth-quarter and full fiscal year earnings on November 20, and investors have some key considerations to keep in mind. Deere has actually performed well from an underlying fundamentals perspective so far this year, but there are lingering uncertainties regarding the agriculture industry that need to be addressed.
Shares of Deere & Company have stagnated throughout 2013, badly trailing the overall market, which has produced strong gains year-to-date. Even financial pundit Jim Cramer recently took to the airwaves to express concerns about Deere's upcoming earnings, declining to vouch for the stock because of broad concerns over the agriculture industry. Do investors have reason to worry about Deere's upcoming earnings?
Important items to keep in mind
Concerns over Deere's fourth quarter were underscored by the fact that analysts with Bank of America/Merrill Lynch recently downgraded Deere from buy to neutral, lowering their price target to $89 per share. The analysts also believe continued falling corn prices could impact the company's future sales of farming equipment. This would surely hit Deere, since the company derives roughly three-quarters of its total sales from its agriculture and turf segment, which includes its farm machinery operations.
It's worth noting that some of the decline has been expected, and that management is in front of the issue. The company's fourth-quarter guidance calls for a 5% decline in equipment sales, but Deere still believes it will produce 5% growth in full-year equipment sales.
Deere, as well as other companies that operate within the agriculture industry, have actually performed well so far this year. Deere's third-quarter saw record profits, and over the first nine months of the year, net sales and profits are up 8% and 15%, respectively.
Seed giant Monsanto (NYSE: MON ) clearly did not see any adverse effects from a dour agriculture environment in the fourth quarter. Sales rose in both its fiscal fourth-quarter and full fiscal year. Diluted earnings clocked in at $4.60 per share, up 21% year over year.
Meanwhile, chemicals giant DuPont (NYSE: DD ) is extremely bullish on agriculture over the long-term, staking a long-term growth plan for itself which calls for 12% compound annual earnings growth. Its most recent quarter saw agriculture sales rise 15% driven by higher sales volumes, and overall diluted earnings are up a whopping 77% through the first nine months of the year.
Emerging markets key to future growth
Not entirely surprising is that Deere will lean on its emerging market operations to produce strong results. In the United States and Canada, industry sales of turf and utility equipment as well as agricultural machinery are expected to increase 5%. By contrast, worldwide sales of agriculture and turf equipment are projected to increase 7%.
Much of the difference is thanks to the company's strong efforts in developing economies, particularly in South America. Thanks to above-average economic growth, particularly in Brazil, Deere's industry sales in South America are expected to rise 20%, even including unfavorable impacts from currency translations.
Is Deere an ideal long-term holding?
The market isn't expecting much from Deere, evident by the fact that the stock exchanges hands for just 8 times trailing earnings. Deere's earnings multiple and dividend yield are at levels not seen in years. Deere may very well disappoint the market when it releases earnings due to near-term pressures, but long-term investors probably see a lot to like from Deere.
At recent prices, Deere yields 2.5%. While its shares continue to suffer, down 5% since the beginning of 2013 and up only slightly over the past three years, the company keeps pumping dividend increases through to shareholders. Deere has bumped up its payout by 12% compounded annually over the past five years.
The market isn't giving Deere much credit, but a market-beating yield and cheap valuation lead me to believe this is a classic case of the market's irrationality offering an advantageous buying opportunity. Keep Deere's agriculture and emerging market segment performances in mind when it reports fourth-quarter results, but at its current price, Deere looks to be an ideal long-term buy and hold investment.
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