Deere Cuts 600 Jobs to Align Production with Weak Demand

Shares of Deere & Company (DE) slipped 0.46% after it announced that it will lay off more than 600 factory employees permanently at four of its plants to scale back its agricultural equipment production in the wake of weak market demand for its products. This however, does not come as a surprise as Deere during its third-quarter earnings call yesterday, stated that it is planning to reduce agricultural equipment production in the fourth quarter.

Moreover, Deere will also implement seasonal and inventory adjustment shutdowns and temporary layoffs at several of its affected factories. The locations concerned include John Deere Harvester Works, East Moline, Ill.; John Deere Seeding and Cylinder, Moline, Ill.; John Deere Des Moines Works, Ankeny, IA; and John Deere Coffeyville, Coffeyville, KS..

In order to remain competitive, Deere continuously strives to align the size of its manufacturing workforce with market demand for products. In the recent past, Deere had hired several hundred manufacturing employees to meet increased demand for products manufactured in its Midwest U.S. factories. Given the current weak demand, the cut down in production was necessary. In July, Deere informed employees at its Ankeny facility of an extended shutdown affecting most manufacturing employees at that location. Deere has also implemented a seasonal shutdown affecting most of the manufacturing workforce at the John Deere Ottumwa Works, Ottumwa, IA.

The company reported a decline in both its top and bottom lines for the third quarter of fiscal 2014 (ended Jul 31, 2014). Lower shipment volumes, higher production costs primarily related to engine-emission requirements and unfavorable effects of foreign-currency exchange, partially offset benefits from price realization.

Deere expects equipment sales to decrease around 8% year over year for the fourth quarter of fiscal 2014. For the full year, Deere trimmed its forecast to a 6% drop from the previous expectation of a 4% dip. Deere also lowered its net income projection to $3.1 billion from $3.3 billion for fiscal 2014.

Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains strong. Meanwhile in the near term, even though net farm income remains at high levels, farmer sentiments regarding capital goods purchases are becoming more conservative due to lower commodity prices.

Deere will nevertheless benefit from recovery in the construction sector and stabilization in the European economy. Furthermore, given its strong balance sheet, the company can continue to increase dividends and repurchase shares.

Moline, IL-based Deere is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells products in the U.S. and Canada through branch offices as well as through distributors and operates through dealers to resell products internationally.

Deere currently holds a Zacks Rank #3 (Hold). Some better ranked stocks in the sector include ACCO Brands Corporation (ACCO), AO Smith Corp. (AOS) and ARC Document Solutions, Inc. (ARC). All of these carry a Zacks Rank #2 (Buy).