jeff9366
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Is Deere Worth Your Money At $80?
Nov. 26, 2015 7:50 AM ET | About: Deere & Company (DE)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
It's a tough business cycle, and Deere is a tough name to hold.
I do not like its capital deployment strategy.
There's a better alternative in the market.
Just like Caterpillar (NYSE:CAT), Deere (NYSE
E) is at the mercy of the business cycle, but management is adamant it will deliver solid cash flows into 2016, tough trading conditions notwithstanding.
Let's see if that is enough to buy its stock, which surged almost 5% to $80 on Wednesday, following the release of Q4 and full-year results. Its 52-week trading range is $71.8-$98.2.
P&L, Balance Sheet // WILL NOT COPY
There's not much for the bulls in the P&L and in the balance sheet of Deere for Q4 and for the twelve months ended 31 October. Cash and cash equivalents rose about 10% to $4.1bn in 2015, but marketable securities plunged 63% from $1.2bn to $437m.
Sales plummeted, and so did earnings, with annual, fully diluted 2015 EPS coming in at $5.77, which compares with EPS of $8.63 one year earlier.
Sales are falling at a faster pace than costs - by about four percentage points, according to my calculation.
The table below shows the extent of the problem.
TABLE WILL NOT COPY
(Source: Deere)
The speed at which EPS is declining has greatly accelerated year on year, and EPS is expected some $1.4 lower in 2016, which implies a forward P/E multiple of about 20 times. If you think that's a tad rich, you may well be right, but we need to delve into its capital allocation strategy and its cash flow profile before assessing whether Deere is a good opportunity at $80 a share.
Outlook
Deere will be under pressure in 2016 for the third year in a row, but is coping relatively well with a challenging business environment.
The table below shows that it could get better: the guidance for next year, when the dividend cover will drop to a manageable level of 1.6 times (assuming a 5% growth rate), isn't as bad as many feared ahead of results.
TABLE WILL NOT COPY
(Source: Deere)
Its forward yield, based on a price of $80, is just over 3%. The chart below shows trends for quarterly dividends since 2003.
CHART WILL NOT COPY
(Source: Deere)
I am not worried about the payout over the short term, but I do not like Deere's buyback program, which has not slowed down quickly enough to reflect changing realities over the last twelve months.
It is not showing financial discipline: it has kept on repurchasing stock, reducing its share count by 30m to 336m shares outstanding on a fully diluted basis in 2015.
Shareholder-friendly activity is important, of course, and management has bragging rights based on a one-year performance that reads only -8% - that is a remarkable achievement for such a cyclical business.
However, excluding dividends, Deere has offered very limited capital appreciation to shareholders since 2010, and its stock seems overvalued based on cash flow metrics at a time when cash flows are plunging, which points to one direction for its stock - and that is down.
Its current strategy is consistent with its track record, but now it could carry more risk that at any given time in recent years. The table below shows sources and uses of cash between fiscal 2004 and 2015 for the equipment operations.
TABLE WILL NOT COPY
(Source: Deere)
Deere is splashing out top dollar to buy back its own stock, as the table below shows, and will likely continue to do so, at least until its gross cash position is sound.
TABLE WILL NOT COPY
(Source: Deere)
In a call with analysts, chief financial Raj Kalathur said:
"Now we also expect to continue generating strong cash flow. Last year, Deere delivered third highest ever level of cash flow from operations and we are forecasting a very healthy level of cash flow of over $2.5 billion in 2016."
My take on this topic is rather different: operating cash flow for the equipment business is a key metric, and it remains under a huge amount of pressure, which should force Deere to reconsider its capital deployment strategy.
The table below shows the trends for operating cash flow over the last decade.
TABLE WILL NOT COPY
(Source: Deere)
Frankly, the capital allocation strategy of Caterpillar - which significantly reduced stock buybacks in the first nine months of 2015 - is much more appealing, and although CAT is faced with dividend risk, in my view, and its stock doesn't look like a hard bargain, I would certainly choose it over Deere, also in the light of trading multiples that are much more attractive based on cash flows.
LINK TO ARTICLE WITH GRAPHICS: Is Deere Worth Your Money At $80? - Deere & Company (NYSEE) | Seeking Alpha
Nov. 26, 2015 7:50 AM ET | About: Deere & Company (DE)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
It's a tough business cycle, and Deere is a tough name to hold.
I do not like its capital deployment strategy.
There's a better alternative in the market.
Just like Caterpillar (NYSE:CAT), Deere (NYSE
E) is at the mercy of the business cycle, but management is adamant it will deliver solid cash flows into 2016, tough trading conditions notwithstanding.Let's see if that is enough to buy its stock, which surged almost 5% to $80 on Wednesday, following the release of Q4 and full-year results. Its 52-week trading range is $71.8-$98.2.
P&L, Balance Sheet // WILL NOT COPY
There's not much for the bulls in the P&L and in the balance sheet of Deere for Q4 and for the twelve months ended 31 October. Cash and cash equivalents rose about 10% to $4.1bn in 2015, but marketable securities plunged 63% from $1.2bn to $437m.
Sales plummeted, and so did earnings, with annual, fully diluted 2015 EPS coming in at $5.77, which compares with EPS of $8.63 one year earlier.
Sales are falling at a faster pace than costs - by about four percentage points, according to my calculation.
The table below shows the extent of the problem.
TABLE WILL NOT COPY
(Source: Deere)
The speed at which EPS is declining has greatly accelerated year on year, and EPS is expected some $1.4 lower in 2016, which implies a forward P/E multiple of about 20 times. If you think that's a tad rich, you may well be right, but we need to delve into its capital allocation strategy and its cash flow profile before assessing whether Deere is a good opportunity at $80 a share.
Outlook
Deere will be under pressure in 2016 for the third year in a row, but is coping relatively well with a challenging business environment.
The table below shows that it could get better: the guidance for next year, when the dividend cover will drop to a manageable level of 1.6 times (assuming a 5% growth rate), isn't as bad as many feared ahead of results.
TABLE WILL NOT COPY
(Source: Deere)
Its forward yield, based on a price of $80, is just over 3%. The chart below shows trends for quarterly dividends since 2003.
CHART WILL NOT COPY
(Source: Deere)
I am not worried about the payout over the short term, but I do not like Deere's buyback program, which has not slowed down quickly enough to reflect changing realities over the last twelve months.
It is not showing financial discipline: it has kept on repurchasing stock, reducing its share count by 30m to 336m shares outstanding on a fully diluted basis in 2015.
Shareholder-friendly activity is important, of course, and management has bragging rights based on a one-year performance that reads only -8% - that is a remarkable achievement for such a cyclical business.
However, excluding dividends, Deere has offered very limited capital appreciation to shareholders since 2010, and its stock seems overvalued based on cash flow metrics at a time when cash flows are plunging, which points to one direction for its stock - and that is down.
Its current strategy is consistent with its track record, but now it could carry more risk that at any given time in recent years. The table below shows sources and uses of cash between fiscal 2004 and 2015 for the equipment operations.
TABLE WILL NOT COPY
(Source: Deere)
Deere is splashing out top dollar to buy back its own stock, as the table below shows, and will likely continue to do so, at least until its gross cash position is sound.
TABLE WILL NOT COPY
(Source: Deere)
In a call with analysts, chief financial Raj Kalathur said:
"Now we also expect to continue generating strong cash flow. Last year, Deere delivered third highest ever level of cash flow from operations and we are forecasting a very healthy level of cash flow of over $2.5 billion in 2016."
My take on this topic is rather different: operating cash flow for the equipment business is a key metric, and it remains under a huge amount of pressure, which should force Deere to reconsider its capital deployment strategy.
The table below shows the trends for operating cash flow over the last decade.
TABLE WILL NOT COPY
(Source: Deere)
Frankly, the capital allocation strategy of Caterpillar - which significantly reduced stock buybacks in the first nine months of 2015 - is much more appealing, and although CAT is faced with dividend risk, in my view, and its stock doesn't look like a hard bargain, I would certainly choose it over Deere, also in the light of trading multiples that are much more attractive based on cash flows.
LINK TO ARTICLE WITH GRAPHICS: Is Deere Worth Your Money At $80? - Deere & Company (NYSE
E) | Seeking Alpha
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