Deere to Gain on Upbeat Agricultural Market Amid Inflation
On Nov 28, we issued an updated research report on Deere & Company DE. The company’s performance will be backed by upbeat agricultural and construction equipment markets and acquisitions. However, the company’s results might be marred by challenges in Argentina and elevated expenses.
Let’s illustrate these factors in detail.
Upbeat Agricultural Market to Stoke Growth
For fiscal 2019, Deere anticipates net sales to be up about 7% year over year and projects net income of about $3.6 billion. The company remains well positioned to grow on the back of positive agricultural and construction equipment markets. U.S. crop cash receipts, an important indicator for equipment demand, are estimated to be about $120 billion in fiscal 2019. Record yields and higher prices for corn are estimated to offset softness in soybean prices. Additionally, improved prices for cotton and wheat continue to be supportive of crop cash receipts as well.
Acquisitions Support Deere
Over the last three years, Deere has effectively utilized M&A to help execute crop care strategy, completing four acquisitions, including Monosem, Hagie, Mazzotti, and King Agro. In September 2017, Deere acquired 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.
Further, the company 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 well underway with the Deere-Wirtgen team working toward the synergy target of EUR 100 million by 2022. Deere also completed the acquisition of PLA which will assist it in providing innovative, cost-effective equipment, technology, and services to customers.
Elevated Expenses to Hurt Earnings
Deere’s earnings will be affected by elevated expenses in fiscal 2019. It expects SA&G expense to flare up about 7% for the fiscal. Furthermore, unfavorable impact of acquisition cost and purchase accounting related to the Wirtgen buyout will dampen earnings. Also, unfavorable impacts of raw material prices and higher freight cost remain headwinds.
Challenges in Argentina to Hurt Deere’s Results
In the EU28 region, revenues are likely to be approximately flat as a result of drought conditions in key markets in fiscal 2019. In South America, industry sales of tractors and combines are projected to be flat to up 5%, benefiting from strength in Brazil. However, growth in Argentina may remain challenged in the near term as the country battles high inflation and political uncertainty. Asian sales are forecast to be flat to down slightly. Industry sales of turf and utility equipment in the United States and Canada are expected to be flat to up 5% for fiscal 2019.
Share Price Performance
Shares of Deere have gained around 3% over the past year, while the industry has recorded a decline of around 4%.
Zacks Rank & Stocks to Consider
Deere currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same space include Enersys ENS, CECO Environmental Corp. CECE and Flowserve Corporation FLS. While Enersys flaunts a Zacks Rank #1 (Strong Buy), CECO and Flowserve carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enersys has a long-term earnings growth rate of 10%. Its shares have rallied 24%, over the past year.
CECO has a long-term earnings growth rate of 15%. The company’s shares have surged 44%, in a year’s time.
Flowserve has a long-term earnings growth rate of 17.3%. The stock has gained 15% in the past year.
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