A Deere in the Headlights
With Trump throwing dirt at the company's suspected plans, let's see what kind of trade strategy we can unearth.
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Let's sift through trade options for Deere & Co DE as the company is taking digs from candidate Donald Trump.
For a little background, back in early June, Deere unveiled plans through a filing with the Securities and Exchange Commission to cut both production and salaried-level jobs, as part of an effort to reach its priorities while increasing efficiency, and "reducing overlap and redundancy." The month prior, Deere had lowered its outlook for the full current fiscal year, while forecasting decreasing sales for two of the firm's three main business units. The cause? Weaker demand for agricultural and turf growing related equipment.
Trump Talk
Republican presidential nominee and former President Donald Trump spoke at an event before a group of farmers in Pennsylvania on Monday. Trump made reference to recent reports that Deere & Co might move some of its manufacturing jobs to Mexico where it has been acquiring land after laying off over 800 employees in Illinois and Iowa. The former president said, "I'm just notifying John Deere right now, if you do that, we're putting a 200% tariff on everything you want to sell into the United States, so that if I win, John Deere is going to be paying a 200% -- they haven't started it yet. Maybe they haven't even made the final decision yet. But, I think they have."
Deere stock dropped a couple of percentage points in overnight trading, but have mostly recovered as I write this before the opening bell. Deere is an iconic American-based industrial company, well known for its green and yellow equipment manufactured for use in farming, forestry and to a lesser degree, construction. That said, the company is already a global operator, with facilities in both Europe and South America.
Remember, the audience here was a rural one with a keen interest in agriculture as an industry in a key battleground state that both the former president and his opponent, Democratic party nominee Vice President Kamala Harris have been fawning all over. Trump then turned his focus on China, adding... "My first call, I'm going to call up President Xi and say you have to honor the deal you made. You made a deal, you'd buy $50 billion worth of American farm product. And I guarantee you he will buy it, 100% he will buy it."
What Does Deere & Co. Do Now?
I don't think a 200% tariff on one company, singled out, is probably realistic. That said, should the former president regain his old position, Deere should probably either drag its feet on making any definitive announcements regarding the property in Mexico and if the election does go former President Trump's way, then start negotiating a solution where the company's cost concerns are addressed and the negative impact on U.S. labor is in some way diminished.
Looking Ahead: The Numbers
Deere will report fiscal third-quarter earnings on Nov. 21. That's almost two months away and more than two weeks after the election. By that time we can hope (no promises) we'll know who won the election and Deere can say something in the call (because it will be asked) about the short- to medium-term future in regard to capital spending and operating expenses.
For the "current" quarter, Deere is expected to post an adjusted earnings per share of $4.11, and an unadjusted EPS of $3.96 on revenue of $9.39 billion. The comps are steep. For the year-ago period, Deere had put an unadjusted EPS of $8.26 on revenue of $15.412 billion through the hoop. That means that if expectations are realized Deere is facing an earnings decline of 52.1% on revenue declining 32.1%. Over the past three months, 11 of the 13 sell side analysts that I can find that track this name have reduced their earnings estimates.
Interestingly, DE trades at 17-times forward looking earnings vs. 11 times a year ago, when performance was much better. It pays $5.88 per share per year in cash dividends, which yields 1.44%. Deere's not so similar industrial U.S. cousin, Caterpillar CAT, which trades at 16-times forward looking earnings and yields 1.52%, so the two are in line with each other.
The balance sheet has some issues related to its finance division debt, which is sizable. The rest of the balance sheet is not so bad. It is imperative for Deere to post sizable fiscal fourth-quarter free cash flow. The fiscal third and fourth quarters, at least in recent years, have consistently been when Deere makes bank in terms of free cash generation. That's the metric to watch on top of the election.
The Chart and My Take
Readers will see that DE has come out of a double-bottom reversal pattern with a $390 pivot very nicely as both the stock's reading for relative strength and daily Moving Average Convergence Divergence have soared.
I probably would have had a target price in the high $440s, just looking at this pattern, but I would caution against such targeting. While the stock did apex close to $450 in July of 2023, readers will see below that DE is now trading where stiff resistance has consistently shown up ever since...
Of course that puts the new pivot at just about $417.
Personally, I would not get long or increase any existing longs ahead of the presidential election. Technically, I would rather buy this stock on momentum just above the new pivot than get long the shares just below what has been resistance. I would call DE a short-term short opportunity, but in this global monetary environment, I would be really slow about doing anything in size in high-priced stocks on the short side at this time.
At the time of publication, Guilfoyle had no position in any security mentioned.
