Following the news that Warren Buffett has added to his stake in Deere & Company (NYSE:DE), it's highly likely that large numbers of Buffett followers will be excited to look at the company's first-quarter earnings. In short, there were more negatives than pluses, particularly on the headline numbers.
Let's take a closer look at the numbers and underlying trends from the first quarter.
Deere & Company reports first-quarter results
In a nutshell, Deere reported a whopping 19% decrease in net sales in the first quarter and lowered full-year estimates for net income and equipment sales.
At the time of its fourth-quarter results in November, management outlined full-year 2015 guidance for net income of $1.9 billion and predicted net sales would decrease 15% from 2014. Fast forward to the first quarter, and these estimates were reduced to $1.8 billion and 17%, respectively.
Fortunately, you don't have to invest using nutshells, and the underlying trends are somewhat more positive than the headline data suggest.
First, Deere's net sales decrease of 19% was better than the 21% decline management had previously forecast. In addition, recall that the U.S. dollar has strengthened significantly since the end of November. Indeed, currency translation took 2 percentage points of equipment operations' net sales in the first quarter. Ultimately, Deere's first-quarter net sales of $5.6 billion were ahead of analysts' estimate of $5.53 billion.
Currency effects and crop prices
Second, much of the downgrade to full-year estimates is due to the stronger dollar. For example, the previous full-year net sales forecast of a 15% decline included 2 percentage points of loss due to currency, therefore the ex-currency decline forecast was 13%. The current forecast of a 17% decline includes 3 percentage points of currency loss, indicating a decline of 14%.
Moreover, breaking out the data by operations indicates an underlying improvement in its construction and forestry and financial services operations. However, let's recall that agriculture and turf operations typically contribute more than 80% of net income.
|Metric||Ex-Currency Forecast||Previous Ex-Currency Forecast||Forecast||Previous Forecast||Underlying Change|
Ag and Turf Net Sales
|Construction and Forestry Net Sales||7%||6%||5%||5%||Better|
|Financial Services Net Income||$630||$610||Better|
Third, Deere's guidance for crop prices remains largely unchanged, despite a recent uptick in prices for key crops such as corn, wheat, and soybeans.
If crop prices turn out to be better than Deere forecasts, then farmers' income is likely to be higher than expected, and its equipment sales could be better than forecast, too.
Two things to look out for
On a more negative note, there are a couple of things to look out for in the results.
First, worldwide financial services saw a provision for credit losses of just 0.02% -- a figure significantly lower than its 15-year average of closer to 0.5%. While this is good news -- it indicates that credit quality is good in the farming industry -- it's also a concern because this kind of level doesn't look sustainable on a historical basis. In other words, the financial services division might not see the benefit of such low credit loss provisions in future.
Second, this is the second quarter in a row that Deere has reported price realization of 1%. However, its full-year forecast is for 2% price realization. In other words, it might not be able to increase prices in the manner management thinks.
A decent quarter
All told, the earnings report is better than the headline numbers suggest, but it's still a net negative. The slight reduction in the ex-currency forecast for full-year agriculture and turf net sales is not a major issue. In addition, if the crop price outlook improves and the dollar weakens, then Deere could yet surprise on the upside in 2015.
Lee Samaha has no position in any stocks mentioned. (It would be great to hear what farmers/readers think about where crop prices will go this year. Also, are you guys cutting back on acreage planted in response to lower prices?)
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