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Down on the Dividend Farm, Deere's Stock Is Becoming a Bargain

NEW YORK ( TheStreet) -- Last week, Deere & Co. (DE - Get Report) , the world's largest maker of farm equipment, reported that its fiscal third-quarter profit fell by 15%, and it cut its profit forecast for the year. A day later, it announced that it's laying off more than 600 workers at four factories in the U.S.

The shares fell about 2% after the earnings report, but have since rebounded, trading Tuesday morning at $86.12, up about 1.8% from Wednesday close. The stock is down 5.7% year to date, compared with a 6.9% gain for the Standard & Poor's 500 Index.

Deere's stock trades at 9.4 times this year's estimated earnings, compared with a forward price-to-earnings ratio of 18.5 for the S&P 500. So the bad news may already be priced into Deere's stock, meaning the shares may be on their way to becoming a relative bargain.

There is plenty of bad news. The company has been hurt by a drop in corn prices in the U.S., its largest market. With lower corn prices, farmers are less likely to buy new equipment.

Deere forecasts that sales of agricultural and turf equipment -- the company's largest segment, accounting for more than 80% of its overall operating profit -- will drop 10% in fiscal 2014, which is 3 percentage points lower than its previous estimate. The fall will be across all regions, with the sharpest drop in South America.

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Deere's profit margin in the past quarter fell by a percentage point to 9%, and sales dropped by 5%.

Still, Deere projects sales in its construction and forestry segment, which accounts for 17% of operating profits, will rise by 10% in fiscal 2014, which ends in October,

And for investors looking for cash, Deere offers a dividend yield of 2.8%, compared with an average of 1.9% for companies in the S&P 500.

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At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates DEERE & CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate DEERE & CO (DE) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, notable return on equity and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • DE, with its decline in revenue, slightly underperformed the industry average of 3.6%. Since the same quarter one year prior, revenues slightly dropped by 5.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • In its most recent trading session, DE has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • Current return on equity is lower than its ROE from the same quarter one year prior. This is a clear sign of weakness within the company. Compared to other companies in the Machinery industry and the overall market, DEERE & CO's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • DEERE & CO's earnings per share declined by 9.0% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, DEERE & CO increased its bottom line by earning $9.08 versus $7.64 in the prior year. For the next year, the market is expecting a contraction of 7.4% in earnings ($8.41 versus $9.08).

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