Stock Analysis: Deere & Company (DE)

Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

A couple weeks ago, John Deere posted its second quarter earnings reports.  Earnings was a solid beat at $2.65 per share on the quarter vs. the $2.48 consensus.  Earnings were at $9.95B vs. estimates of $9.65B.  All in all, another solid quarterly beat.However, as is the usual script for John Deere earning's calls, the forecast was downbeat.  Ag and Turf revenue is forecast to be down 7% for 2014 and global sales are expected to be down 4%.  One interesting bright spot is the strength seen in the Construction and Forestry segment as they predict a 10% gain in revenues.  This downbeat outlook and less than excited conference call resulted in the stock dropping from it's near $95 price mark to breaking just below $90 over the last couple weeks.  This is pretty much a normal pattern for the stock.

Earnings were stong, revenues strong, guidance on par with what the company has been saying.  To the market, the guidance was downbeat.  It's obvious that earnings and revenue growth appears to be slowing some, but in past calls, the company has said that the growth rates they were seeing were unsustainable.  1 year earnings growth rate is over 19% while the 5 year rate is just over 14%.  Now that grain prices have normalized around a more "reasonable" price compared to the high prices seen in the past, I believe Deere's earnings are likely to get more normalized as well.  I find a slowing earnings growth rate a hard reason to drive stock prices down when the stock sells at 9.9 times last year's earnings and only 10.25 times next year's earnings on a 7% earnings decrease estimate.  The Ag machinery sector usually prices at about 16 times earnings and Deere has one of the best track records in the sector.  That being said, the stock is flat, year to date while the S&P 500 is up 3.44%.  The company clearly feels the stock is undervalued as well since they have established a $8 billion share repurchase program, which is now initiated as their previously established $5 billion plan as been all spent - this means that $1 billion was spent since October 2013 up until May.  This is something to watch as it can also be a factor as to size of the earnings beat.

My Stock Ownership Plans:
I feel last quarter's results were strong, but the slowing growth is a slight concern to watch.  This company has a habit of being overly conservative and from what I know of the ag sector, I think this may be the case.  A late spring in the US - especially the northern plains is making it difficult to get corn in or expect strong yields.  I think this will have an impact on corn prices over the summer and into the fall that would be higher than provided estimates.  This could prove to be an unexpected boost to sales in fourth quarter or first quarter next fiscal year.  I also see a very strong balance sheet, growing operating cash flow, and revenues which are still growing at or better than the industry average despite declines.  This makes the valuation of the stock still low with much more room to grow.  I rank this stock at a 2 with a target price of $100.  This puts the stock at 11.8 times earnings on a $8.45 earnings estimate (7% below last year's $9.09 eps).  This is still well below the industry average.  I think it's also important to note that the company currently has 369.7 million shares outstanding.  This will need to be tracked to see how share repurchases affect future earnings.