NEW YORK (TheStreet) -- The decision by Warren Buffett's Berkshire Hathaway to sell its entire position in Deere & Company (DE) earlier this year didn't exactly provide a vote of confidence for the manufacturer of John Deere tractors. At around $90, shares are down 1.2% for the year to date.
Indeed, the company has several weaknesses that could impede the progress of its stock. But recent developments also provide reasons for cautious optimism. Let's examine the issues.
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The company released its outlook for fiscal 2015, with Deere's management expecting sales in the agriculture and turf segment to drop by 20%, while its construction and forestry segment will rise slightly by 5%. Since the agriculture and turf segment accounts for roughly 80% of Deere's equipment sales, this outlook doesn't bode well for the company. Most of this drop is related to the U.S., European Union and South America including Brazil. The International Monetary Fund also revised down its outlook for growth rate in economies sincluding China, Brazil and EU. This is another negative indication for Deere.
Based on these changes, the construction and forestry segment is likely to account for a bigger share in the Deere's total equipment sales -- from 19% in fiscal 2014 to 25% in fiscal 2015.
In the past year, the company also saw a drop in profitability mainly due to a drop in profit margins in the agriculture and turf segment. Nonetheless, this segment's operating profitability was still higher than its construction and forestry segment. Therefore, we are likely to see even lower earnings next year.
The company also expects to spend a lower amount of its capital expenses in FY2015 than in FY2014, a drop from $1 billion to $875 million.
But there are also some positive signs: With respect to the agriculture and turf segment, the progress in demand for grains, wheat and corn could provide an indication for the changes in demand for Deere's equipment.