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Deere Poised at Neutral

Zacks Equity Research

We maintain our Neutral recommendation on Deere & Co. (DE).  The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Deere delivered earnings of $2.61 per share in the second quarter and worldwide total sales of $10 billion, both ahead of the respective Zacks Consensus Estimates. Deere expects equipment sales to grow around 15% in fiscal 2012. The guidance includes an unfavorable currency-translation impact of 3%. Net income is projected at $3.35 billion, up from the previous expectation of $3.275 billion.

Deere is riding a wave of strong demand for agricultural commodities and increase in farm income globally. The United States Department of Agriculture forecasts net farm income to be at $91.7 billion in 2012. It is expecting a record corn crop of 48 million tons this year, up 4.5 million tons year on year, which will be the largest yield in the last 75 years.

This bullish trend will be witnessed worldwide, as the global corn production is estimated to rise 10% with several countries posting record yields. This will encourage farmers to invest in the latest machinery to maximize productivity, favoring Deere and other companies in this space.

Deere is focusing on extending its global presence in a big way. The company is extending its manufacturing footprint in the overseas markets of China, Brazil, India and Russia. The expansion in the emerging markets should provide long-term growth opportunities.

Population growth and increase in living standards in the emerging markets are fueling growth in the global food demand.  In addition to growing its footprint in the overseas markets, Deere is also increasing its focus on the U.S. and Canadian markets. This area generated nearly 60% of the total revenues and about 75% of the company’s profit in 2011.

Deere’s sales will also be supported by the launch of a range of advanced new products. In 2011, Deere introduced a record number of products, most of which featured improvements in power, comfort and performance. The new products include premium combines, the most powerful line of John Deere tractors ever made, that set standards for capacity and productivity.

Other new products launched in the market are the largest-ever self-propelled sprayers, one of which has a 120-feet boom. New models of construction equipment include advanced excavators, productive dozers and loaders with hybrid electric drivetrains.

On the flipside, Deere has to comply with the Final Tier 4 emission standards. Meeting these standards will require a significantly new and expensive technology. There also remains the risk of higher-than-normal maintenance and repair costs with the implementation of the Interim Tier 4 products.

The increased costs for the Interim Tier 4 technologies and products, higher research and development expenses and inflated costs of materials could put further pressure on margins in 2012. Furthermore, sales in South America will be affected due to the drought in Argentina and southern Brazil, as well as the uncertain agricultural policy environment in Argentina.

Illinois-based Deere & Co. is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells its products in the U.S. and Canada through branch offices as well as through distributors and dealers for the resale of products internationally. Deere competes with Caterpillar Inc. (CAT), CNH Global NV (CNH) and Kubota Corporation (KUB).

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