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Deere (DE) Bets on Improving Agriculture & Construction Markets

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Deere & Company’s DE results so far in fiscal 2021 have been impressive. The company reported a whopping 169% improvement in earnings in second-quarter fiscal 2021 earnings, which followed growth of 137% in the first quarter. This upside can be attributed to improving conditions in both the farm and construction sectors on the back of a recovering global economy.

For the first half of fiscal 2021, worldwide revenues improved 25% year over year to $21.170 billion. Net income for the period soared 155% year over year to $3.013 billion (or $9.55 per share) from $1.182 billion (or $3.73 per share). Backed by the ongoing momentum, Deere raised its net income guidance for fiscal 2021 to a range of $5.3 billion to $5.7 billion from the prior $4.6 billion to $5.0 billion. The mid-point of the new range suggests year-over-year improvement of 100%.

Improving farm income driven by recovering agricultural commodity prices has led farmers to resume investing in new equipment and replacing their aging fleets. Agricultural equipment makers like Deere, AGCO Corporation AGCO, Lindsay Corporation LNN are benefiting from this turnaround. Global stocks of grain have tightened significantly this year due to multiple factors such as increased Chinese grain imports and recovery in ethanol usage and weather-related production losses in South America. Deere expects grain and oilseed consumption to outstrip supply this year.

While government support is expected to decrease this year, principal crop cash receipts in the United States are expected to increase 30% gaining from higher commodity prices. Further, U.S customer sentiment has gone up over the last few quarters with elevated exports to China. Given the positive environmental backdrop, Deere has witnessed robust order activity, which poises it well for an improved performance in this fiscal and the next.

For the Agriculture & Turf segment, the company expects industry sales of large agricultural equipment in the United States and Canada to be up roughly 25% for fiscal 2021, and small agricultural and turf equipment to be up roughly 10%. In Europe, the industry is expected to be up around 10% as higher commodity prices favored business conditions in the arable segment, mitigating some weaknesses in dairy and livestock.

In South America, industry sales of tractors and combines are likely to go up 20%. Higher commodity prices, strong production and a favorable currency environment have boosted farmers’ income leading to improved orders. Despite limited government sponsored financing programs, private financing is more widely available this year and supporting continued strength in equipment demand. Industry sales in Asia are forecast to be up slightly.

Net sales for Deere’s Production and Precision Agriculture segment is anticipated to be up between 25% and 30% in fiscal year 2021. The segment’s operating margin is expected between 20% and 21%. The Small Agriculture and Turf segment’s net sales is expected to be up between 20% and 25% and its operating margin is forecast between 16.5% and 17.5%.

The company has also been witnessing improvement in the Construction & Forestry segment. Backed by strength in the housing market as well in non-residential sector, Deere expects North American construction equipment industry sales to be up between 15% and 20%, while sales of compact construction equipment are expected to be up between 20% and 25%. In forestry, the company expects the industry to be up between 15% and 20%, as lumber demand remains robust, particularly in North America. Sales for the Construction & Forestry segment are projected to be up between 25% and 30% and operating margin is likely to be 12% to 13% in fiscal 2021.

However, Deere anticipates increased supply chain pressures through the balance of the year.  Rising demand and COVID-19 disruptions have caused capacity constraints all along the supply chain, which has left Deere and other manufacturers like AGCO and Caterpillar Inc. CAT, to name a few, short of raw materials. Further, these are facing significant inflation for both raw materials and logistic that will continue to impact results this year.

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