Farm equipment manufacturer, Deere & Company's(NYSE:DE)fourth-quarter earnings beat analyst estimates, but its outlook was probably weak enough to shake out a few of the value hunters that have been buying the stock. There is no question Deere is a profitable company that looks like a good value on a long-term basis, -- after all, crop prices won't go down forever -- but what do these results say about its current trends and prospects?
Deere & Company gives fourth-quarter earnings
A brief summary of its fourth-quarter results and guidance
Fourth-quarter net sales decreased 7% to $8.04 billion versus analyst consensus of $7.75 billion
Fourth-quarter diluted EPS fell 13% to $1.83 versus analyst consensus of $1.57
Full-year net income of $3.16 billion versus internal guidance of $3.1 billion
So far, so good, but the problem is with the guidance. Anyone hoping for a quick bounce back in Deere's fortunes would have been disappointed with management's guidance for net income of $1.9 billion in 2015. Moreover, net sales are forecast to decline by 15% in 2015 -- Deere and Company's management are definitely not predicting a trough in fortunes just yet.
Deere's crop price outlook worsens
I will get to a more detailed appraisal of company guidance in a moment, but first a look at its outlook for U.S. farm commodity prices. Despite a resurgence in its construction and forestry segment (operating profit increased 71% in the segment in 2014), Deere's prospects are still governed by its agriculture and turf segment.
Unfortunately, at each quarterly earnings, Deere has lowered its forecasts for future U.S. farm commodity prices, with notable weakness being seen in corn and wheat prices.
|2014 Forecast at Q3||2014 Forecast||2015 Forecast at Q3||2015 Forecast|
Indeed, in the earnings press release, CEO, Samuel Allen disclosed that its sales slowdown,
"has been most pronounced in the sale of large farm machinery, including our most profitable models" and then went on to assure investors that "even with a significant decline in sales ... John Deere expects to remain solidly profitable in 2015"
Deere gives weak guidance
A break out of its guidance for 2015 reveals that the tale of two segments looks set to continue next year.
Net sales expected to decline by 15%
Net income is forecast to decline from $3.16 billion to $1.9 billion
Agriculture and turf segment net sales expected to decline by 20%
Construction and forestry net sales forecast to increase by 5%
In a sense, none of this should surprise investors, because another farming equipment manufacturer, ACGO Corporation (NYSE:AGCO) lowered its full-year forecasts in October. ACGO's management cited softening demand, and informed investors that the company's "priority" will be to lower its dealer and company inventories in order to "better align us with current market demand." Readers should not be surprised if this leads to some increased price competition in the industry -- something else for Deere investors to worry about.
Where next for Deere and Company?
All told, the outlook wasn't good, but then Fools couldn't have expected too much from the company in the present environment of falling crop prices. Ultimately, Deere is a highly cyclical company, and the key conclusion from the report is that the bottom of the current cycle isn't in sight just yet.
Of course, this doesn't mean the stock isn't a good value, -- I will address the value proposition in future articles -- but the recent earnings gave Fools more cause for concern in the near-term. It could get worse before it gets better.