DE
🚜 Deere & Company’s business is currently facing challenges due to a cyclical downturn, presenting a potential buying opportunity.
📉 Sales and net profits have declined, with expectations of further drops in the coming year.
💰 Despite the downturn, Deere maintains a strong market position, pays dividends, and actively repurchases shares.
🌍 Future growth depends on factors like U.S. monetary policy, commodity prices, and Chinese economic stimulus.
@invertirdesdecasa:
“Today, we’re analyzing Deere & Company, a heavy machinery company, mostly agricultural, which, as you’ll see, is suffering quite a bit in its business. Eventually, when the commodity cycle reverses and prices start to improve, who knows, it might be a very interesting opportunity with a very interesting profit potential. Deere & Company capitalizes at a little more than $110 billion. Looking at the results of the fourth quarter of 2024, you can see a bit of the effects of the fall in the cycle. Total sales fell by almost 28%, with equipment or machinery sales falling sharply. This is their largest division, and all of this, of course, then translated into their net profits. Costs were there; that’s the problem with cyclical companies. Sometimes sales fall a lot, and it’s difficult to cushion that fall in sales, falling almost 50% in net profits. Earnings per share fell a little less because Deere & Company is an excellent company with a good track record of buying back shares. In fiscal year 2024, you can see that the fall was a little less. It started to worsen after it began to be discounted that Donald Trump was going to win, the dollar began to strengthen, and commodities began to fall. A 1% drop in sales to a little more than $51 billion. The same thing, all of this was transferred to the final profits. These are commodity companies; cushioning the fall in sales is a bit difficult because there are many fixed costs to sustain. A 30% drop in net profits in annual terms, and earnings per share fell a little less to 2% because Deere & Company buys back many shares in addition to paying a good dividend. It may be that we have not yet seen the bottom of the cycle fall. Who could know how the price of commodities will be tomorrow, the dollar, and so on? But you can see here that in all its business divisions, both by industry or by larger sectors, of course, heavy equipment in the United States, large drops are expected in the quantities of equipment that will be delivered, except here in South America, which is expected to be flat. In everything else, falls are still projected in terms of the demand from distributors, the orders that Deere is seeing. This is what the company estimates. Therefore, perhaps we did not see the end of the cycle fall. Logically, this will translate to the numbers. This is how a company is. So, if the business slows down, the numbers will slow down, and eventually, the market may not like it at all, with net profits falling, or it is estimated that they will fall even more this year. They were 7.1 billion in 2024, which has just ended. It is expected to fall to 5 to 5.5 billion dollars, and it is expected that free cash flows, which are operating cash flows minus capital expenditures, will be around 4 billion dollars approximately. To highlight this number here, it is almost, or better said, a little more than a 50% drop versus the year 2022. Here it should say, if I’m not mistaken, that in two years, Deere & Company’s net profits fell by 50%. That is a company in a cyclical business. The price of the main commodities remains quite low. There is a very strong dollar against all kinds of assets. Logically, this affects the demand for agricultural machinery, of course. Imagine if one owns a field or is an agricultural producer, the low price of commodities is not very encouraging, at least today. The strong dollar, as I say, is not helping this trend to change. The Fed also said that it will probably be more restrictive with fewer interest rate cuts for the year 2025. Will it be so? I don’t know; nobody knows that. But I’m telling you the facts we have today. Will it always be like this? The answer is very, very clear at this point: no, the answer will not always be like this. It is a cycle; everything is cyclical. So, just as net profits can fall 60 or 70%, as you are seeing that it will probably happen in this fiscal year versus previous years, the truth is that they also rebound strongly. Yes, and cycles and trends sometimes change very quickly. For all this, it seems to me that it can be an interesting opportunity for you to analyze a company that you can understand quite well. Deere & Company capitalizes a little more than 115 billion dollars. It will fluctuate around there, of course, when the video comes out. In this fiscal year 2024, which has already ended, as I explained to you recently, it generated about 7.1 billion dollars, 7 billion dollars, and on average, to see what the average net profit generation is. It generated about 6 billion in net profits on average in this period of time, 2019-2024. That is, it is trading at about 16 times the profits of the previous year, which had a sharp drop but remained good, and it is trading at about 20 times the profits, which would be the average profits. Of course, nothing on the stock market is pure mathematics, but average profits of this period of time that I show you around here, the prices seem quite fair, quite interesting for a company that is a good dividend payer, a repurchaser of shares, and that is seeing the low part of the cycle. So, what about future growth prospects? What will happen with commodities, rates, and China? In conclusion of this video, why do I mention the United States, rates, and China? Well, very simple, for two reasons. If the United States begins to loosen its monetary policy, it is to be expected that the dollar will devalue, and that is good for the price of commodities. Secondly, why do I mention China? Well, it is the main consumer of commodities globally. It consumes a lot of oil, a lot of iron ore, a lot of wheat, soybeans, and so on. Therefore, eventually, a reactivation, let’s agree that it is growing at 4-5% in its GDP, but even greater stimulation can be very good for this new super cycle of commodities, or rather, the upper part of commodities. All of this, of course, will influence the mood of agricultural producers worldwide, mainly in the United States, Brazil, and other aero-exporting countries such as Argentina. Secondly, it will greatly influence the profits that this company can deliver and, above all, the mood of the market. Therefore, it seems to me that beyond the fact that in the year it has not done anything, it has had a very slight growth of 5%, when this cycle reverses, we can see, it seems to me, interesting revaluation potentials in this company. It also pays a fairly solid dividend, and it constantly repurchases its shares. This has made earnings per share grow very strongly, and I think we can all agree that it has a dominant market position and that agricultural machines will continue to be needed. For a defensive profile, for a more conservative profile that does not feel comfortable paying the very high multiples of the entire technology or tech market worldwide, it seems to me that it is worth analyzing. What do you think? Leave it in your comments, please. You know, many people read the comments, be critical, add value, and of course, add to the community.”
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Read more articles by the world’s top 100 analysts on Deere & Company (DE) at the following link. DE stock.
