In another attempt to scale back its agricultural equipment production in the wake of weak market demand for agricultural products, Deere & Company (DE) announced its plans to retrench 460 employees at its Waterloo, IA operations, scheduled on Oct 20, 2014. Shares of Deere slipped 1.7% following the news.
This news comes on the heels of Deere’s announcement a week ago of laying off over 600 factory employees at four of its plants. The locations concerned include John Deere Harvester Works, East Moline, Ill.; John Deere Seeding and Cylinder, Moline, Ill.; John Deere Des Moines Works, Ankeny, IA; and John Deere Coffeyville, Coffeyville, KS.
None of these however come as a surprise as Deere, during its third-quarter earnings call on Aug 14, had stated its intentions to cut back on agricultural equipment production in the ensuing quarter.
In order to remain competitive, Deere continuously strives to align the size of its manufacturing workforce with market demand for products. In the recent past, Deere hired several manufacturing employees to meet increased demand for products manufactured in its Midwest U.S. factories. Thus, the current weak demand calls for production cut down across several plants. In July this year, Deere informed employees at its Ankeny facility of an extended shutdown. Further, Deere has implemented a seasonal shutdown at the John Deere Ottumwa Works, Ottumwa, IA.
Notably, news of these layoffs follows Deere’s lackluster earnings. The company reported a decline in both its top and bottom line for the third quarter of fiscal 2014 (ended Jul 31, 2014). Lower shipment volumes, higher production costs primarily related to engine-emission requirements and unfavorable effects of foreign-currency exchange partially offset benefits from price realization.
Meanwhile, Deere provided a bearish outlook for fiscal 2014, expecting equipment sales to decrease around 8% year over year in the fourth quarter of fiscal 2014 and full-year sales to drop 6%. Deere also lowered its net income projection to $3.1 billion from $3.3 billion in fiscal 2014.
Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Meanwhile, in the near term, even though net farm income remains at high levels, farmer sentiments regarding capital goods purchases are becoming more conservative due to lower commodity prices.
Deere will nevertheless benefit from recovery in the construction sector and stabilization in the European economy. Furthermore, banking on its strong balance sheet, the company has the leverage to hike dividends and execute share repurchases.
Moline, IL-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells products in the U.S. and Canada through branch offices as well as through distributors and operates through dealers to resell products internationally.
Deere currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include ACCO Brands Corporation (ACCO), AO Smith Corp. (AOS) and ARC Document Solutions, Inc. (ARC). All of these carry a Zacks Rank #2 (Buy).
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