Earlier today, Deere reported fourth-quarter net income of $649 million, or $1.83 a share, compared with $806.8 million, or $2.11 a share in the year earlier quarter. That said, Deere's earnings exceeded Wall Street's expectation of $1.57 a share even as the Moline, Ill-based company blamed the slowdown in the farm economy for net sales of $8.9 billion that were 5% lower than for the same period a year earlier.
But it was the profit guidance for next year that spooked Wall Street. Deere forecast net income of $1.9 billion, below consensus expectations, with company equipment sales projected to fall 15% in 2015 and down 21% in the first quarter compared to last year.
The stock was down 0.87% to $87.03 at last check. Here's what analysts said.
Andrew Casey, Wells Fargo Securities (Underperform; $72-$75 PT)
DE beat short-term expectations (higher operating profit, credit contribution, and lower share count that offset higher tax rate), but its outlook suggests continued large farm equipment demand compression in FY2015. Management provided beneath-consensus FY2015 net income guidance (i.e., $1.9 billion versus consensus $2.18 billion--estimate implied FY2015 EPS guidance of approximately $5.50 per share versus consensus' FY2015E $6.36). We expect the stock to have a negative reaction, and the outlook likely will also be a negative read-through for other agricultural equipment manufacturers (i.e., Underperform-rated AGCO, 44.66).
Our thesis that DE's earnings power will be pressured by a multiyear demand decline remains intact. Without good visibility on when a demand trough will happen makes a positive investment case in DE difficult, in our view.
The major focus going into today's FQ4 print for Deere was FY15 net income guidance. The bad news is that the number came in 14% below consensus
($2.2bn) and 7% below BofA ($2.05bn). The good news is that Deere has come out with a figure that hopefully doesn't have to be revised lower continuously throughout FY15. This will push more of the debate to the FY16 outlook and whether FY16 will be lower than FY15, which we assumed going into today. Deere also printed a very strong FQ4, and this should help cushion some of the blow on the stock today, even though Deere had rallied 10% off its early October lows. Ultimately, we expect consensus FY15 EPS to settle around $5.50, about 13% below consensus of $6.30.
Joel Tiss, BMO Capital Markets (Market Perform; $78 PT)
Deere reported FY4Q14 results this morning, with the highlight being the FY2015 net income guide of $1.9 billion. We believe this implies an EPS range of $5.20-$5.75 depending on the share count assumption as the company continues to chip away at its $8 billion share repo authorization announced last December with some $7 billion left. Net equipment sales are expected to decline 15% for the full year (down 21% for FY1Q) with Ag & Turf sales down 20% lead by a 25-30% decline in North America and down roughly 10% in both EMEA and South America. Slightly offsetting weakness from ag is an expected 5% increase in sales from the Construction & Forestry segment. We note the revenue outlook is largely in line with our current model, suggesting the impacts from the negative mix shift in ag equipment on profitability could have a larger impact than we previously expected.
Despite whispers of a below consensus FY2015 guide, we believe the shares today could see quite a bit of pressure as investors absorb the shock of the sub-$6.00 in EPS outlook and Street estimates are materially lowered.
Stephen Volkmann, Jefferies (Hold; $90 PT)
DE's FY2015 outlook is well below consensus although we believe investors expected a conservative guide. Some investors will likely applaud the aggressive cut in hopes DE has captured most of the cycle downside, while the ~45% decremental margin implied in guidance may cause others to worry about the potential magnitude of additional cuts as the downturn progresses.
Unfortunately, given DE's farm production forecasts, the slide in farm fundamentals looks likely to continue. Additional share repurchase could soften the blow a bit, although DE's cash generation forecast for FY15 is down ~35% from FY14. As sentiment remains negative for the NA farm outlook, investors are going to be closely looking at order board visibility and inventory levels on the call. F1Q15 sales are forecasted to be down 21% y/y compared to consensus of down 10% y/y. We believe DE will be aggressive in cutting production -- the company plans to cut inventory even against this weak sales forecast -- which suggests that F1Q could be a particularly weak quarter.
"We rate DEERE & CO (DE) a BUY. This is driven by several positive factors, 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 2.5%. 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 7.7% in earnings ($8.38 versus $9.08).
- You can view the full analysis from the report here: DE Ratings Report
-Written by Laurie Kulikowski in New York.