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The Worst Isn’t Over: Inside Deere’s Outlook Downgrades for Fiscal 2016

Shannon Black

Deere's Fiscal 2Q16 Results Are Out, but No One's Celebrating

(Continued from Prior Part)

Deere’s outlook downgrades

Deere & Company (DE) has downgraded its fiscal 2016 profit guidance once again after trimming its guidance in fiscal 1Q16, citing competitive pressures for its Construction & Forestry Equipment segment and increased write-downs in its Financial Services (IYG) unit.

The company now expects its fiscal 2016 net income to be $1.2 billion, which is $100 million lower than its previous forecast of $1.3 billion. The company has maintained its forecast of cash flow operations at $2.1 billion, a decline of 32% YoY (year-over-year).

However, the company bumped up its fiscal 2016 sales forecast by one percentage point majorly due to expectations of lower currency impact compared to previous estimates. The currency impact in the Agriculture (DBA) Equipment segment is now expected to be 2%, as compared to the previous forecast of 4%. Overall sales are expected to decline by 9%, with a 1% positive price realization, offset by a 2% impact of currency translations.

Share buybacks

In our company overview, based on our analysis of the free cash flow coverage ratio, we stated how Deere’s share buybacks could take a backseat this year. Deere’s CFO, Rajesh Kalathur stated as much in the conference call when he said that maintaining the ‘A’ credit rating was the highest priority for the company and that share repurchases were last in line after acquisitions and dividends.

Investors should note that of the $8 billion share repurchases authorized in 2013, the company has completed $4.7 billion worth of repurchases to date. In fiscal 2016, the company has repurchased just $107.2 million YTD (year-to-date).

Analyst recommendations

The consensus rating among the 23 analysts covering Deere & Company (DE) (DBA) hasn’t changed much since we published our pre-earnings write-up. After the company’s fiscal 2Q16 earnings release, Bloomberg reported that six of the 23 analysts issued “buy” and “sell” ratings on the stock, and the remaining 11 analysts issued a “hold” rating. Major competitors of Deere include AGCO (AGCO) and CNH Industrial in the agriculture equipment space and Caterpillar (CAT) in the construction equipment market.

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