On Jul 2, 2015, we issued an updated research report on Deere & Company DE. The manufacturer of agricultural, construction, forestry and consumer equipment is expected to benefit from improvement in the nonresidential construction sector, higher housing starts as well as innovative product introduction. However, low farm income, soft energy sector and tight credit condition remain headwinds.
In the second-quarter of fiscal 2015, Deere reported earnings of $2.03 per share, a 23% decline year over year owing to slowdown in global farm economy. Revenues decreased around 18% to $8.12 billion in the quarter, mainly due to a 20% drop in equipment operations sales.
However, Deere expects to be solidly profitable in 2015 driven by increased global demand for food, shelter and infrastructure. Global trends based on population growth and rising living standards remain intact and are largely unaffected by periodic swings in farming economy. Deere foresees global sales for Construction & Forestry equipment to advance about 2% in 2015, reflecting further economic recovery and higher housing starts in the U.S. Also, global forestry sales are expected to hold steady with 2014 levels.
Notably, Deere divested its crop insurance unit to Farmers Mutual Hail Insurance Company, as agreed upon in Dec 2014. The sale includes both John Deere Insurance Company and John Deere Risk Protection, Inc., which together formed the business unit. Deere will continue to design, manufacture and offer technology, equipment and services in its precision agriculture offerings. Deere has been persistently shedding its non-core assets in order to become more profitable.
On the acquisition front, Deere purchased Bauer Built Manufacturing in order to expand its portfolio of agricultural equipment and enhance its ability to serve larger farms in key markets globally in 2014. The company also acquired Sao Paulo, Brazil-based Auteq Telematica, which is an onboard software and computer company that also specializes in hardware support. The acquisition will provide Deere additional specialization in the sugarcane market.
However, Deere remains concerned about equipment operation sales, which is expected to decrease around 19% year over year in fiscal 2015. USDA’s (U.S. Department of Agriculture) forecast for U.S. farm income in 2015 is pegged at $73.6 billion, the lowest since 2009 and a 32% drop from 2014. This is mainly because of falling crop prices, which will affect farm income.
Moreover, weakening conditions in the energy sector; political, economic and social uncertainties; strong competition as well as aggressive pricing and manufacturing delays could adversely affect Deere’s business.
Deere currently carries a Zacks Rank #3 (Hold).
Stocks that Warrant a Look
Better-ranked stocks in the sector include Kubota Corporation KUBTY, AGCO Corporation AGCO and Lindsay Corporation LNN. While Kubota Corporation sports a Zacks Rank #1 (Strong Buy), AGCO and Lindsay Corporation hold a Zacks Rank #2 (Buy).
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