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Bear of the Day: Deere and Company (DE)

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Sometimes the Zacks Bear of the Day is a company with truly dismal prospects – possibly even a stock that’s so bad that not only should investors avoid owning it, but aggressive traders might want to consider initiating a short position.

Deere and Company (DE - Free Report) is not one of those stocks. It’s an iconic American heavy equipment manufacturer with truly global reach and solid plans for both cutting costs and expanding product offerings. Unfortunately, it’s also been on the wrong side of several global economic trends that threaten to weigh on results in the immediate future.

Recent reductions in company revenue guidance and subsequent negative earnings estimate revisions have landed Deere at the bottom of our rankings – a Zacks rank #5 (Strong Sell).

The trade disputes between the US and China – and to a lesser extent, Europe – have really put a squeeze on sales of agricultural equipment. US producers who had grown accustomed to exporting a huge amount of agricultural products abroad saw many of those international purchases drop off to near zero basically overnight.

Difficult weather conditions in the US in 2019 further added to the misery.

It’s a basic economic reality that when farmers are experiencing favorable economic conditions, they frequently invest much of the surplus in equipment purchases. When times are tight, they generally curtail or delay big spending plans.

In an strange paradox for Deere, one of their strengths can actually hurt the company in times like these. Deere equipment is renowned for its high quality and durability. Though each new generation of machines adds technological advances that help farmers to work less, increase yields or both, the long useful life of the older equipment means farmers can keep servicing, maintaining and using their aging machinery during periods when they feel the need to tighten their belts.

In fact, it was reported recently that the used market for Deere tractors that are now 40 years old has been firming up lately because that generation of equipment – which lacks many of the modern comfort, convenience and data collection features of newer models – can also be repaired and maintained by even the smallest farmers.

Even though the latest “Phase 1” deal between the US and China will include a significant increase in Chinese purchase of US agricultural products over the next two years, it will take quite a while for those sales to make it to the bottom line for US farmers, meaning they’ll probably be making do with old equipment for the foreseeable future.

Deere management certainly hasn’t been ignoring the issue. In response to falling revenues, they’ve been getting increasingly lean - by cutting staff and unprofitable product lines, and also making strategic investments in new products aimed more at the heavy construction industry rather than just agriculture.

They are also developing “precision agriculture” technologies that allow farmers to plant in ways that decrease costs while increasing yields.

As I mentioned earlier, the current situation is far from a disaster. Deere has been around since 1837 and with more than $32 billion of annual revenues - plus $4.4 billion in cash and over $50 billion in current assets on the balance sheet - they’re certainly not going away anytime soon.

The next year or so could be rough however, so Deere shareholders might want to consider alternatives until the dust settles.

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