On Nov 30, 2015, we issued an updated research report on Deere & Company DE. The company is poised to benefit from innovative product introductions and divestiture of non-core assets and acquisitions. However, its performance will likely be hurt by low farm income, weakening conditions in the energy sector, lower commodity prices and tight credit conditions.
Notably, Deere is optimistic about the long term, buoyed by steady investment in new products and geographies. The company expects to earn profits driven by increased global demand for food, shelter and infrastructure. Favorable trends derived from a more affluent and increasing population and rising living standards will also provide ample opportunity for growth.
Deere expects sales growth of turf and utility equipment in the U.S. and Canada to range from flat to positive 5% in 2016, on the back of general economic growth. The gain reflects further economic recovery and higher housing starts in the U.S. GDP growth is positive, unemployment is on the decline, construction hiring is on the rise and housing starts are expected to exceed 1 million units this year.
Further, the US Architecture Billings Index (ABI), an economic indicator that provides an approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, has remained above 50 in recent months, signaling robust conditions ahead for the industry. This also bodes well for Deere.
During 2015, Deere divested its crop insurance unit to West Des Moines, IA-based Farmers Mutual Hail Insurance Company (FMH). The company has been persistently shedding its non-core assets in order to become a more focused and profitable firm and has completed the sale of its irrigation unit and a majority interest in its landscape operations.
However, Deere expects total equipment sales to decline 7% year over year in fiscal 2016 and fall around 11% in the first quarter. Weak conditions in the energy sector, decline in rental utilization rates and sluggish economic growth outside the U.S. are the persistent challenges facing Deere.
Low farm income, lower commodity prices, tight credit conditions and economic pressure will also tend to hurt Deere’s growth. As per the U.S. Department of Agriculture’s (USDA) latest projection, farm income will drop 38% in 2015 to $55.9 billion in 2014 due to declining crop and livestock prices.
Segment-wise, the company estimated Agriculture and Turf Equipment sales to decline 8% in fiscal 2016. Region-wise, Deere anticipates industry sales for agricultural equipment in the U.S. and Canada to be down 15 to 20% for fiscal 2016 due to low commodity prices and stagnant farm incomes. Sales are expected to be most pronounced for higher-horsepower models.
In the EU28, sales are projected to be flat to down 5% due to low commodity prices and farm income including the potential pressure on the dairy sector. In South America, industry sales of tractors and combines are expected to decline 10%–15% year over year due to economic uncertainty in Brazil and higher interest rates on government-sponsored financing.
Over the past 30 days, the Zacks Consensus Estimate for Deere declined 4.5% to $4.21 per share for fiscal 2016, while the same increased 0.7% to $4.29 per share for fiscal 2017.
At present, Deere carries a Zacks Rank #3 (Hold).
Stocks Warranting a Look
Some better-ranked stocks in the sector include Albany International Corp. AIN, Brady Corp. BRC and Berry Plastics Group, Inc. BERY. All these stocks sport a Zacks Rank #1 (Strong Buy).
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