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Deere (DE) to Buy Unimil, Expand Sugarcane Business in Brazil

Zacks Equity Research

Deere & Company DE has entered into an agreement to acquire Unimil to expand its sugarcane business in Brazil. Based in Sao Paulo, Brazil, Unimil is a provider of the after-market service parts business for sugarcane harvesters. Financial terms of the deal have been kept under wraps.
Brazil churns around one-third of the global annual sugarcane production, making it the world’s number one supplier of sugarcane. Notably, the acquisition will support Deere’s commitment in growing its sugarcane business and making investments to reduce customers’ production costs for sugarcane. Recently, Deere unveiled a sugarcane harvester designed to significantly lower production costs.

Deere provides connected support service to maximize equipment up time and grower productivity. Along with Unimil, Deere will expand its service parts portfolio and also offer cost-effective solutions for customers. Deere will use its current direct-to-customer business model for selling Unimil products, while also providing dealers with additional support and services for sugarcane customers.

The U.S Agriculture industry has been grappling with low commodity prices and sluggish farm incomes. Tariffs imposed by China on U.S. agricultural exports last year were a severe blow given China is the largest export market for U.S. agriculture producers. Nevertheless, China’s latest decision, in a partial trade deal, to substantially increase import of U.S. agricultural products is likely to boost Deere’s financials.

Industry sales of agricultural equipment in the United States and Canada are anticipated to be flat year on year. Sales for the EU28-member nations will also remain flat year over year, due to the ongoing uncertainty regarding Brexit. The South American industry sales of tractors and combines are projected to be flat to up 5% as strength in Brazil will be offset by weak performance in Argentina, thanks to the political and economic uncertainties. Sales in Asia are forecast to be flat to down slightly. Deere anticipates Agriculture and Turf equipment sales to increase a meager 2% in fiscal 2019.

However, upbeat results from the Construction & Forestry segment will help negate the impact of a weak agricultural sector on Deere’s results. For fiscal 2019, U.S. GDP, total construction investments, housing starts and oil activity remain at supportive levels for equipment demand. Global transportation investment is will likely be up about 5%, spurring demand for road construction equipment. Deere projects global sales for Construction & Forestry equipment to rise 10% in fiscal 2019.

Deere acquired the world's leading road-construction equipment maker, Wirtgen, in December 2017. The buyout significantly enhanced Deere's exposure to global transportation infrastructure. Wirtgen's integration is on track. It also completed the acquisition of PLA, which will assist it in providing innovative, cost-effective equipment, technology and services to customers.

For fiscal 2019, Deere anticipates net sales to improve about 5% year over year, aided by price realization of 3% and the Wirtgen acquisition. Net income is expected at around $3.2 billion in the fiscal. Deere is assessing cost structure by reviewing organization efficiency and footprint assessment, which, in turn will help improve margins.

Moreover, Deere will benefit from its concerted focus on launching products with advanced technologies and features, which provides it a competitive edge. The company remains focused on revolutionizing agriculture with technology, in an effort to make farming automated, easy to use and more precise across the production process. Consequently, Deere continues to invest in technology leadership and data analytics.

Share Price Performance

Deere's shares have gained 11.2% over the past year, while its industry has rallied 10.6%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Atkore International Group Inc. ATKR, Cintas Corporation CTAS and Sharps Compliance Corp SMED, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Atkore International Group has a projected earnings growth rate of 19.8% for the current year. The stock has gained 57.3% so far this year.

Cintas has an estimated earnings growth rate of 12.74% for 2019. Shares of the company have rallied 58.3% year to date.

Sharps Compliance has an estimated earnings growth rate of a whopping 500% for 2019. The company has rallied 20.6% so far this year.

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