On Dec 20, we reiterated our Neutral recommendation on Deere & Company (DE) based on expected benefits from recovery in the construction sector and investment in Brazil. However, lower commodity prices and farm incomes continue to be major concerns for this producer of agricultural and forestry equipment, construction equipment and engines
In line with its intention to invest its resources and thereby boost its core businesses, Deere is reviewing strategic options for the John Deere Water division and entered into an agreement to sell 60% of John Deere Landscapes ownership for $300 million in Oct. The John Deere Water division manufactures and distributes precision agricultural irrigation equipment and supplies. John Deere Landscapes distributes irrigation equipment, nursery products and landscape supplies, including seed, fertilizer and hardscape materials, primarily to landscape service professionals.
Deere expects worldwide sales of construction and forestry equipment to increase approximately 10% for 2014. The gain reflects further economic recovery and higher housing starts in the U.S. as well as sales increases outside the U.S. and Canada.
In September, Deere completed the purchase of Bauer Built Manufacturing in order to expand its portfolio of agricultural equipment and enhance its ability to serve larger farms in key markets globally. Demand for the Deere Bauer Series planters have grown quickly in the last few years predominantly in North America. Apart from North America, there is lot of potential in Brazil and Argentina where large farms demand such highly productive machines.
Despite these positives, the risks surrounding the stock have forced us to maintain a neutral stance on Deere. Lower commodity prices and farm incomes, lower equipment sales outlook, weakness in European markets, and higher production costs and research and development costs associated with interim Tier 4 are detrimental to the company’s performance.
Other Stocks to Consider
Deere currently retains a Zacks Rank #3 (Hold). Some better-ranked stocks in the retail sector include Kubota Corporation (KUBTY), H&E Equipment Services Inc. (HEES) and Alamo Group, Inc. (ALG). While Kubota carries a Zacks Rank #1 (Strong Buy), Alamo Group and H&E Equipment Services hold a Zacks Rank #2 (Buy).