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Berkshire Hathaway’s new stake in John Deere

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Berkshire Hathaway and John Deere

Warren Buffett’s Berkshire Hathaway established a new position in Deere & Company (DE) through the purchase of 24.6 million shares. Deere & Company (whose brand name is John Deere) represented 1.94% of the fund’s portfolio size.

Although Berkshire Hathaway had been accumulating shares in John Deere since 3Q14, the fund chose not to disclose it to the public in order to avoid copycat moves.

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Overview of John Deere

Along with its subsidiaries, Deere & Company operates in three major business segments:

  • Agriculture & Turf
  • Construction & Forestry
  • Financial Services

The Agriculture & Turf segment manufactures and distributes tractors, harvesters, corn pickers, loaders, sprayers, nutrient management tools, soil preparation machinery, balers, mowers, and golf course equipment, among other things.

The Construction & Forestry segment builds and distributes a range of machines and service parts used in construction, earth moving, material handling, and timber harvesting.

John Deere refers to its first two segments collectively as “equipment operations.” The company derives nearly 90% of its revenues from equipment operations.

Deere & Company’s third segment, Financial Services, finances the sales and leasing of new and used equipment by John Deere dealers. The segment also offers crop risk mitigation products, retail revolving charge accounts, wholesale financing to equipment dealers, and extended equipment warranties.

First-quarter results

In 1Q15, revenues decreased 17% YoY (or year-over-year) to $6.4 billion. Equipment operations sales fell 19% YoY to $5.6 billion. Weakening grain prices led to lower capital spending in the global farm sector, and this was the primary cause of John Deere’s declining sales during the quarter. Net income slipped to $386.8 million or $1.12 per share in 1Q15 from $681.1 million or $1.81 on a per-share basis from the same period a year ago.

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Management’s expectations for 2015

Due to sluggish demand conditions, John Deere anticipates a 17% decline in sales for fiscal 2015 and a 19% sales decline for 2Q15. Management believes that, despite pullbacks in the agricultural sector, the company is likely to remain profitable due to a wider stream of revenues and a more durable business model. The company expects revenues of $1.8 billion for the full year 2015.

John Deere is a component of the industrial select sector SPDR ETF (XLI) with a stock weighting of 1.76%. Caterpillar (CAT), the company’s closest competitor, has an allocation of 2.89% in the same ETF.

Other Berkshire Hathaway positions in 4Q14

In addition to adding a stake in John Deere, Berkshire Hathaway initiated a position in Twenty-First Century Fox (FOXA) during the fourth quarter. The fund also increased its stakes in International Business Machines (IBM), Suncor Energy (SU), General Motors (GM), and Charter Communications (CHTR).

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