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Agricultural equipment manufacturer Deere & Co. (NYSE: DE) got hammered after reporting third-quarter earnings on Friday. The stock closed down more than 8%, a huge decline for this industry leader.
Shares fell into correction territory following the Deere earnings release, meaning the stock was down more than 10% from its 52-week high.
Deere’s problems stem from very weak growth in the emerging markets, as well as lower commodity prices in the United States.
Here is what’s going wrong for Deere, and whether the stock may still be worth a look.
A Year to Forget
Overall, Deere’s third-quarter revenue and net income fell 20% and 34%, respectively, versus the third quarter of last year. Deere has had a tough year in 2015. It’s getting hit on multiple fronts. The strong U.S. dollar has eroded international performance. And, if that weren’t enough, farm incomes are down across the globe due to the sharp collapse in agricultural commodities.
This has meant huge damage in places like Brazil, where Deere does a lot of business. Outside the U.S. and Canada, revenue fell 23% year-over-year, with about half the damage coming from unfavorable foreign exchange fluctuations.
These headwinds are expected to persist longer than the company previously anticipated, which is why Deere management reduced its full-year forecast after providing quarterly earnings. Deere expects full-year equipment sales in Brazil to decline by 20%-25%. In the U.S. and Canada, revenue is forecast to be down about 25% as well in 2015. The company now forecasts $1.8 billion to $1.9 billion in full-year profit.
Is the Damage Priced In?
That’s the big question for Deere. On the surface, it seems to be. Deere is a cheap stock; shares trade for just 11 times trailing earnings per share. Even though earnings are expected to decline going forward, its forward P/E multiple is 16, still a significant discount to the broader market.
Another positive catalyst is Deere’s compelling cash returns to shareholders. Despite its declining revenue and earnings, Deere still generates a lot of cash. The company raked in $730 million of free cash flow over the last nine months.
Deere uses this cash to handsomely reward its investors. The company pays a 2.85% dividend yield, which is well ahead of the stock market average. Deere is also a great dividend growth stock. It has increased its dividend at a 15% compound annual rate over the past five years.
Deere is in a rough patch, but that’s what happens in a cyclical industry. The strong dollar and lower commodities could very well be short-term headwinds. It’s important to remember that Deere is still a strong business that is highly profitable and generates a lot of free cash flow.
Taking a longer-term view, Deere provides a vital service, particularly to the more rapidly-developing economies where millions of people are entering the middle class. Demand for food and agricultural solutions should only grow with time.
As a result, shareholders should not panic based on last quarter’s results.
DISCLOSURE: Bob Ciura personally owns shares of Deere & Co. (NYSE: DE).
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