With commodity prices falling and extremely volatile grain prices, farmers are holding back on their capital expenditures, and that means fewer tractor sales and bad news for Deere & Co. (DE.N), makers of the iconic John Deere farm, forestry and construction equipment. CEO Samuel Allen acknowledged on the last earnings release that 2014 was a tough year — and he expects 2015 to be even tougher. Is he sowing the seeds for possibly disappointing news on earnings?
Analysts have been busy lowering estimates for the company, and they may not have gone low enough. There is still a negative Star Mine Predicted Surprise of 5%, which leads us to believe that Deere may still miss even the lowered estimates. Let’s look at some of the reasons for the analyst pessimism.
Source: Thomson Reuters Eikon/StarMine
Surveying the fields
As you can see in the chart above, in 2014/15 there were 900 million tonnes of wheat produced, while only 712 million were used, and the ending balance was higher than in the previous period. So there may be an oversupply of wheat. We see similar trends for other grains, and that has kept prices depressed, which in turn keeps farmers on their toes. The largest revenue generator for Deere is large farming machines, which are likely to be affected the most by this downturn.
Source: Thomson Reuters Eikon/StarMine
Thin harvestsSee also Agrimoney's "Agco warns 2015 will be 'more challenging' than last year".
As you can see, it hasn’t been just 2014 that’s been a tough year — since 2011, Deere’s return on net operating assets has been falling and has reached a four year low of 12.7%, far below the industry median. Management has not been able effectively to generate returns from its assets, even in good times, and now that the environment has become challenging, we could see further deterioration in margins and operating efficiency....MORE
