Deere Bets on Favorable Demand & Acquisitions Amid Cost Woes

On Feb 28, we issued an updated research report on Deere & Company DE. The company is poised to gain from improving construction markets and growing replacement demand for agricultural equipment, acquisitions and introduction of advanced technologies in its products. However, the trade uncertainty continues to affect the buying activity of customers. Moreover, higher raw material costs and unfavorable foreign-currency is likely to affect margin performance.

Let's illustrate the factors in detail.

For fiscal 2019, Deere anticipates net sales to increase about 7% year over year and projects net income of about $3.6 billion. The company remains well poised to grow on the back of improving demand in agricultural and construction equipment markets.

Deere estimates Agriculture and Turf equipment sales to increase about 4% in fiscal 2019, up from the previous forecast of 3% growth. Industry sales of agricultural equipment in the United States and Canada are anticipated to be flat to up 5%. This will be backed by demand for both large and small equipment. Replacement demand also continues to drive order activity on account of the pressing need to replace older fleet and take advantage of the new technology available.

U.S. crop cash receipts, an important indicator for equipment demand, are estimated to be about $124 billion in fiscal 2019 — the highest since 2014. Further, higher corn, wheat and cotton prices will offset softness in the soybean market. Following the aid of $1.65 per bushel from the U.S. Department of Agriculture, the dynamics for soybean will also improve this year. Moreover, per the USDA’s latest available projections, net farm is anticipated to increase 12% year over year in 2019 after a decline of 8% in 2018.

Deere projects global sales for Construction & Forestry equipment to rise 13% in fiscal 2019 backed by strong demand for equipment and the Wirtgen acquisition. In forestry, global industry sales are expected to be up 5% to 10% primarily driven by higher demand in EU28 countries and Russia. The segment’s operating margin is projected to be about 12%. The economic environment for the construction, forestry and road building industries holds promise and continues to support elevated demand for new and used equipment.

Deere acquired the world’s leading road-construction equipment maker, Wirtgen, in December 2017. The buyout significantly enhances Deere's exposure to global transportation infrastructure. Wirtgen’s integration is on track. The company has updated its synergy target to EUR 125 million by 2022. It also completed the acquisition of PLA which will assist it in providing innovative, cost-effective equipment, technology, and services to customers.

Deere will benefit from introduction of advanced technologies in its products. The company’s proprietary and foundational precision technologies such as guidance, telematics, onboard computing and digital operations center, all of which calls for up to 20 years of investment. These foundational elements serve as key enablers for its latest advanced technologies and the combination creates the most differentiated and integrated solution in the marketplace.

Moreover, Deere’s efforts to expand in precision agriculture will be a game changer. In September 2017, Deere acquired Sunnyvale, CA-based Blue River Technology, a pioneer in bringing machine learning to agricultural spraying equipment. Blue River’s technology has aided precision agriculture by shifting farm-management decisions from the field level to the plant level.

The implementation of tariffs and apprehensions regarding stretched out trade talks between the United States and China have weighed on market sentiment and caused farmers to become more cautious about making major purchases. It will continue to hinder the company’s results till a resolution is reached. Further, the implementation of tariffs has led to raw material cost inflation.

Deere will be affected by elevated expenses in fiscal 2019. It expects SA&G expense to rise about 5% for the fiscal. R&D expenses are forecasted to be up 5% in 2019 owing to strategic investments in precision agriculture as well as next generation new product development programs for large agricultural product lines. Furthermore, unfavorable impact of acquisition cost and purchase accounting related to the Wirtgen buyout will dampen earnings. The company expects an unfavorable impact of 2% for foreign-currency translation for fiscal 2019.

Deere’s shares have gained 15.8% over the past six months against the S&P 500’s decline of 3.9%.

Deere currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Industrial Products sector are Mueller Industries, Inc. MLI, Alarm.com Holdings, Inc. ALRM and Albany International Corp. AIN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Mueller Industries has an expected earnings growth rate of 2.2% for 2019.

Alarm.com has an expected earnings growth rate of 7.8% for the current year.

Albany International has an expected earnings growth rate of 44.7% for 2019.

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