Stock Analysis: John Deere: (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.

On Wednesday, John Deere announced their fiscal third quarter results for 2014.  While the past results were rather strong with earnings of $2.33 on $9.5 Billion in sales, it was the forward guidance and leadership comments that caused a lot of concern for where the company and stock is heading.  While I say that results were strong, it's also a matter of comparing what I'm saying they were strong against, which in this case was analyst estimates.  Comparing sales and earnings to a year ago, the results were down 5% and 9% respectively.  This is an indication to the direction in which the company is heading.  They're not growing, but rather shrinking as demand settles to lower levels.  Not only are they shrinking, but many of the areas of guidance the company provided, are going lower, faster than expected during last quarter's results.  Part of the reasons for this is the fact that grain prices have fallen rather dramatically over the course of the last year.  Speaking as a member of a family farm, prices are returning to levels where it is much more difficult to break even.  When that's the case, machinery purchases are slowed as well.  Fiscal year guidance is pointing to a 6% decrease in sales year over year.  While I doubt it'll continue to decelerate at that pace, the fact is that sales are decelerating.  When projecting out to 2015, you have to start factoring in the likelihood of another year with 4%-6% decline in sales. 

As expected in the preview I gave in last week's portfolio summary, management did nothing to make this even begin to feel better than the numbers were showing.  Everything looked down, cash receipts are expected down, dealer inventories are up some,  International demand and impacts such as China appear negative.  Mind you this is mostly in regards to the Ag and Turf group.  Forestry and Construction showed a pleasant improvement, however, this is a rather small portion of Deere's full business, and therefore can only soften the blow of Ag's negative results slightly.  If you like the construction story, Caterpillar (CAT) would be a better stock to hold.  The one credit I can give is that this isn't a management issue.  Despite their inability to provide conference calls the exude confidence, they're executing as well or better than any competitor.  This is purely a market driven event - simply not enough demand.  Finally, the day after the earnings call, the company laid off 600 factory workers due to reduced demand.  This is a company that doesn't see this downward trend reversing soon and needed to cut costs.

Re-analyzing my position with the facts in front of me, I need to downgrade my position on this stock.  Earnings are decelerating, as are sales.  I'm anticipating 2014 earnings of $8.40 and with decelerating earnings, it's hard to give this stock anything more than 11 times earnings based on the company's abilities alone.  However, that's the multiple I give on 2015 earnings estimates, which I'm guessing are going to be around $7.90.  This gives me a price target of $87, but I see downside potential of the stock dropping to the mid 70s.  I don't like the risk to reward ratio right now - about 2 up, 5 down.  I just wish I saw this sooner so I could've sold when the stock was in the 90s.  I'll admit that I'm fearful I'm turning on this stock too late, but there are still analysts out there bullish and there are more favorable odds that the stock won't turn until they do.  The 2.6% yield doesn't provide a strong enough floor when the company isn't growing and this also supports why I believe the stock will fall to at least the area of its next technical floor of $80 before we see any significant surges in the stock.  With all of these facts in front of me and the fact that my portfolio is too large, I am ranking this stock a 4.  It's best I retain my meager gains and look to try again another time.