Warren Buffett Plants Seeds Early on Deere
Warren Buffett’s boosted bet on Deere looks good, but early
Mr. Buffett’s Berkshire Hathaway Inc. revealed earlier this week that it increased its position in Deere & Co., a poster child for the struggling agricultural-equipment industry hurt by low crop prices. In its fiscal 2015 ending in October, some 75% of Deere’s revenue came from its agriculture-and-turf division.
And when Deere reports fiscal first-quarter earnings on Friday, the global slowdown is expected to continue taking a toll on results. Analysts expect earnings of 70 cents a share for the period ending in January, down 37% from a year earlier. The strong dollar is also expected to continue pressuring Deere’s revenue, which analysts expect to log a decline of 13%.
Berkshire’s bet comes as the farm-machinery industry in 2015 suffered its worst sales year since 2009. Net farm incomes slumped 38%, the second consecutive double-digit drop.
Farm incomes, which correlate with Deere’s bottom line, are expected to fall another 3% this year, according to the U.S. Agriculture Department. They haven’t fallen for three straight years since the 1970s.
Still, Berkshire has amassed a $1.5 billion position in Deere, the world’s largest seller of tractors and harvesting combines. As of the fourth quarter, Berkshire’s stake rose to 17.1 million shares, or 5% of total shares, according to a filing.
The move has recently proven savvy. Deere shares are up about 5% in the year to date; the S&P 500 has lost nearly 6%. But since the summer, Deere has lost nearly one-fifth of its market value. Getting back to the August highs won’t be easy.
In November, Deere forecast industrywide sales of farm equipment in the U.S. and Canada this year will drop 15% to 20% from 2015 levels.
True, Deere’s 2016 outlook topped downbeat expectations. And any signs the worst is over will certainly be well received.
Mr. Buffett preaches being greedy when others are fearful, something he is doing with Deere. But he has more time than many fund managers to let a position play out and greater wherewithal to stomach further downside.
For these mere mortals, Deere’s stock still looks like a poor crop.