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Deere preps for earnings as Buffett ups stake

A man works on a customer's John Deere lawn tractor at the Buck Bros. dealership in Hampshire, Illinois.
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A man works on a customer's John Deere lawn tractor at the Buck Bros. dealership in Hampshire, Illinois.

Warren Buffett's Berkshire Hathaway is sowing more funds into farm machinery giant Deere, and defensive investors are taking notice. Analysts consider Deere's good cash flow and dividend yield as attractive and see the potential for new stock buybacks as another positive.

After sinking 14 percent last year, Deere stock is up about 7 percent this year through Wednesday — handily beating the S&P 500 index and outperforming another multinational industrial play, Caterpillar. The stock is even beating Apple, Facebook and Google parent Alphabet.

A regulatory filing late Tuesday revealed that Berkshire Hathaway boosted its stake in Deere by about 5.8 million shares to about 22.88 million shares, or a 7.2 percent stake. Berkshire Hathaway is now Deere's largest institutional shareholder with a stake worth nearly $2 billion.

"Deere is a pretty safe dividend in a world where income alternatives are relatively low and not that fantastic," said Morningstar analyst Kwame Webb. He also cites the "safety and sanctity of the free cash flow" at Deere and adds that "it looks like the bottom is finally in sight for ag."

Deere is set to report fiscal first quarter earnings before the bell on Friday. Investors will be waiting to see if management provides an update on current full fiscal year guidance.

Webb believes Deere will generally maintain fiscal 2016 guidance for now but could make "a minor adjustment for currency," reflecting the impact of the strong dollar that continued to provide headwinds since the company's last update in November.

"Investors will be focused on any update to management's expectations for FY'16, including its U.S. farm income assumptions and agriculture market outlook by region," JPMorgan analyst Ann Duignan said in research note to clients on Wednesday. She noted that the U.S. Department of Agriculture last week made a downward revision to its previous estimates for current year U.S. farm cash receipts.

Duignan said industry fundamentals have not improved since Deere's last earnings conference call.

Analysts polled by Thomson Reuters expect Deere to report earnings of 70 cents per share in its fiscal first quarter ended in January. That would represent a 37 percent decline from $1.12 per share from the same period a year ago. Revenue is projected by the Street to be down nearly 12 percent to $4.96 billion.

Deere's agriculture and turf segment, which is slightly more than three-fourths of the company's overall revenues, is forecast to show sales down as much as 20 percent in the quarter from the previous year. The construction and forestry segment is forecast to see sales decline roughly 15 percent to 18 percent compared with the year-ago period. The financial services segment also is seen posting lower results.

With low commodity prices and farm incomes falling, there's been a deterioration of ag credit conditions, according to a downbeat report last week from the Federal Reserve Bank of Chicago. The tougher conditions in the farm economy have resulted in excess new and used inventory of agrigulture machinery equipment.

The Moline, Illinois-based manufacturer has been undergoing production-line realignments as it attempts to reduce costs during the ag downturn. Deere currently has announced about 1,500 manufacturing layoffs and its headcount is down by about 10,000 since the ag peak, largely reflecting the sale of several businesses.

"In good years farmers took opportunities to upgrade their equipment, so now I think you're seeing the result of that," said Mark Watte, a dairyman who also farms cotton, nuts and other crops in California's San Joaquin Valley. "It's no surprise new stuff is slow to move and there's probably a fair amount of used stuff that's just sitting there."

Deere management indicated during the last earnings call that leasing "is becoming more attractive to many of our customers. That's because of an uncertain business environment coupled with the lack of confidence and clarity in tax incentives."

CORRECTION:

This story has been updated to clarify the proportion of Deere's reduced headcount attributable to manufacturing layoffs.