Deere and Company Inc. To Continue Feeling The Pinch But Still Expected To Do Well This Year

Lower crop prices and expected interest rate rise likely to hit the company other segments of the company expected to do well to neutralize the effect

This week has been kind to Deere and Company (NYSE:DE).Warren Buffet’s Berkshire Hathaway has reportedly purchased more of the company’s shares, and the company has been branded as the most world’s most ethical companies in the world(this is the ninth time that the company has been awarded the title), according to Ethisphere Institute. Despite this positive news though, in which the company traded between $87-89 on hearing the news, the company is still forecasted to report a decline in revenues.So what is the motive behind Warren Buffet purchasing the company’s shares?

Deere and Company operate in two segments: agriculture and construction.The former generates 80% of the company’s sales.That is partly explained by the company operating and being headquartered in the Mid-Western states of Iowa and Illinois,where the agriculture sector there is the strongest, so the company is making itself feel close to the customers.

The agricultural sector is feeling the pinch right now owing to low crop prices though that is expected due to the fact that agriculture is a highly cyclical sector.But the IMF and the United States Department of Agriculture(USDA) forecast that crop prices may not recover till the fourth quarter of this year.Corn prices are expected to fall about 8%, whereas for wheat it is forecasted to fall by 20%.This is as a result of growing crop supplies around the world, significantly reducing margins for farmers to setting aside their budget to purchase agricultural moving equipment to increase production and crop yield.And even if US farmers cut back, prices are still expected to fall.

Another challenge is the inevitable prospect of the U.S starting to raise its interest rates somewhere around June, way ahead of the September forecast that was forecasted several quarters ago.This will certainly boost the cost of goods, making it unaffordable for many farmers to make purchases

To this end, Deere and Company have expanded into the construction sector and also recently has done the same in the financial sectors. According to information from the last quarter, from the construction and the financial sectors generated 59% of operating income.This will help soften the import cyclical factors affecting the sales of agricultural equipment,which means that even if its sales drop, the construction and the financial sectors can kick in to shoulder the burden of improving the company’s operating income and cash flow.

Overall,patient investors ,who don’t simply look at the performance of one year,may be excercising his investments for the long run,given that Deere and Company has a good track record in terms of compounded earnings-per-share at 12.7% a year and dividends per share at 15.4% a year.That explains why Warren Buffet has purchased 5% of shares by looking at the bigger picture.