Wednesday, 25 November 2015

John Deere: an agri sector behemoth reports

It has not been the easiest last few months for John Deere.  As I noted in my last write-up (link here) a combination of low crop prices and hence variable demand for agricultural machinery hit the company's profitability and pushed the shares down in August.  Whilst little has changed - and the perception towards both commodities and emerging markets has probably worsened since over the last three months - the stock is moving sideways. 

The company's year-on-year Q4 numbers remained shabby at face value...
 ...but underlying themes were not dis-similar than before with good pricing and control of costs and more exogenous factors impacting:

This is anticipated to continue into Deere's fiscal 2016 as the industry outlook remains flat to negative at a sales level across all geographies.  Nevertheless pricing is still anticipated to remain positive and the company was at pains to note that these were industry-wide estimates.  

Nevertheless there are some positives with the company noting on the conference call: 

'demand/supply balance even more compelling than a year ago despite a year of strong production'

inventories - 'much more favourable position than the competition' 

‘long-term fundamentals for the agricultural business in Brazil remain solid’

‘all-time record high for John Deere Financial’

‘leasing is becoming more popular for many of our customers’ 

And then there is valuation.  With a now 3%+ dividend yield and free cash flow of US$2.7bn being all applied to a share buyback (so equivalent to c. 10% of market cap) returns to investors are reasonable.  Cash flow generation will be less in FY16e as per the forecast below but at a historic FY15A x8 market cap:ebit multiple the metrics are not extended.  

Even though there was no mention of the longer-term thematic drivers (ex the quote above) Deere remains in a good place to benefit from such factors.  Trading is still not easy but I still see value - as I do with sector peer Agco (see my most recent write-up of this name here). I remain long both names and pleased to see positive reactions to clearly still mixed numbers reflecting the low sentiment towards the space currently.  

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