Wednesday, 12 February 2014

Deere - still not a dear share

John Deere is a company I like and which I have written up positively before (most recently here: 'Deere - not a dear share'). 

Seeking Alpha noted that the headlines from the company's release appeared positive:

'Deere & Company beats by $0.28, beats on revenue. Deere & Company (DE): FQ1 EPS of $1.81 beats by $0.28. Revenue of $7.65B (+3.1% Y/Y) beats by $1.03B. Deere's net income rose to $681.1M from $649.7M a year earlier. Equipment sales +2.2% to $6.95B, topping forecasts of $6.55B. Forecasts FY profit of $3.3B, above consensus of $3.13B. Expects equipment sales to fall 3% in FY 2014 and 6% in FQ2'
This reads, on balance, well.  What other details were there?  Importantly the forecasts for the core agricultural (and turf) divisional sales was unchanged.  Combine this with the forecasts given by the company of +2% pricing power during their fiscal 2014 and this equates to a good mix.   

Deere always provide an interesting insight into farmer incomes and their comment of 'remain at historically high levels' is a positive at this time of weaker crop prices (but good sized harvests). 

Other observations from the corporate presentation would be the continued low credit losses impacting their finance unit...

 ...and Deere's willingness to continue buying back shares - I note that the run-rate in 2014 to date is above that of the previous few years, consistent with the December announcement of a new US$8bn authorisation. 

Last year the company bought back stock at an average price of around US$82-3.  That level has certainly been a big support for the shares over the last year...just as US$92-3 has been a big resistance point. 

So what to think?  The numbers and forecasts were solid-to-good.  The company unveiled a couple of months ago a buyback equivalent to nearly 25% of their market cap.  That alone is a good reason to hold the shares (albeit this was announced 8 weeks ago). 
At x11 prospective EV/ebit (with the EV inflated by the industrial debt) I can still get US$95-100 as a fairer valuation range today.  The key is getting through that technical resistance at the US$92-3 level shorter-term. 

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