5 Things Deere's Management Wants You to Know

Reviewing the key takeaways from Deere's third-quarter conference call.

Aug 14, 2014 at 7:00PM

After a disappointing earnings report that saw the company lowering its full-year income and equipment sales expectations, Deere & Company's (NYSE:DE) management was obliged to outline how it would deal with weaker conditions. Current conditions are difficult in the farming machinery industry; but what is Deere doing about it? It's time to look at the five key takeaways from its third-quarter conference call.

Deere's end markets getting weaker
As Fools can read about here, Deere's latest earnings report produced a downgrade to sales expectations in its core agriculture and turf segment -- 81% of sales year to date. Essentially, the problem is that weak crop prices are lowering farmers' profits and encouraging them to hold back on purchasing farming equipment.

While lower crop prices are likely to impact farmers everywhere, the first takeaway relates to some specific commentary on China in both agriculture and construction. This is something that investors in Caterpillar (NYSE:CAT) should follow closely, too.

Economic growth is expected to slow in China in the second half of the year and the Ag economy there is slowing as well, due to lower grain prices... ...ongoing subsidies are supportive of agriculture, their pace of increase has slowed. In addition, the construction sector recession has deepened.

In other words, conditions are getting worse in China (construction included), and agricultural conditions are getting worse due to slowing of subsidies. It isn't just about crop prices.

Deere adjusts to weaker conditions
When end markets weaken, companies are usually forced to make adjustments, and Deere outlined some related initiatives, which make up the next two takeaways. First, management outlined that it would be "scaling back production" in line with lower end demand in agriculture. This is a realistic move that investors should welcome, as Deere also downgraded its expectations for U.S. Farm commodity prices for corn and wheat during the next two years.

The second adjustment, and the third key takeaway, is the introduction of a "John Deere certified pre-owned program," whereby products will be tested by certified technicians. This is a good move because it will enable its dealers to sell used equipment more easily. The benefit is that its dealers don't build up too much used inventory and, consequently, Deere can protect pricing on its new equipment.

What about margins?
While Deere is adjusting to the reality of negatively trending crop prices, the question of margin erosion is always likely to come up. In truth, management was noncommittal on the subject. Director of Investor Relations, Tony Huegel, outlined that margin guidance for 2015 would be discussed on the next conference call. This is something to look out for, and I will cover this issue in a future article.

On the one hand, Deere is clearly facing margin pressure from declining sales, and "many" of its small products are transitioning to Tier 4 -- a tighter emissions standard that requires investment. On the other, lower steel prices could reduce its material costs and, as outlined above, Deere is taking measures to scale back production.

Don't forget the weather
The final takeaway relates to the great known/unknown within the agricultural industry: the weather. Indeed, Huegel asked himself a question out loud on the subject: "Question is, what's going to happen with the crop that will get planted next year in terms of do you have yet a third year in a row of good growing conditions on a global basis, or do you have a year where those yields moderate a bit due to weather?"

This is a key point because predictions for crop prices have been reduced in expectation of bumper crops this year. For example, the United States Department of Agriculture, or USDA, recently predicted record U.S. corn and soybean production in 2014 -- something likely to put downward pressure on prices.

However, neither the USDA, Deere, nor anyone else, for that matter, can be completely confident of global weather conditions in 2015. In a sense, expectations are now so low for crop prices that any negative surprise from the weather, in any major crop-producing region of the world, could see sentiment toward the sector change rapidly.

The bottom line
All told, conditions are getting tougher. Deere's management is being proactive, and adjusting to it by scaling back production and helping its dealers to sell used equipment via its pre-owned program. On a more negative note, the information on China was slightly worrying, and the downtrend in crop prices was, too. However, the weather is likely to be an important factor and, if everyone is assuming some clement crop-growing weather in 2015, there could be some positive upside for Deere, given any poor weather.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers