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Favorable Markets, Acquisition Aid Deere Amid Cost Woes

Zacks Equity Research

On Apr 1, we issued an updated research report on Deere & Company DE. Improving construction markets and growing replacement demand for agricultural equipment are likely to drive growth for the company. Acquisitions and introduction of advanced technologies in its products also remain key catalysts. However, higher raw material costs and unfavorable foreign currency are likely to affect near-term margin performance.
 
Let's illustrate the factors in detail.
 
Agricultural & Construction Markets Hold Promise
 
For fiscal 2019, Deere anticipates net sales to increase about 7% year over year and projects net income of about $3.6 billion. This will likely be driven by improving demand in agricultural and construction equipment markets.
 
Deere estimates Agriculture and Turf equipment sales to increase about 4% in fiscal 2019, up from the previously mentioned 3% improvement. Industry sales of agricultural equipment in the United States and Canada are anticipated to be flat to up 5%. This will be backed by demand for large and small equipment. Replacement demand also continues to drive order activity on account of the pressing need to replace older fleet and take advantage of the new technology available.
 
U.S. crop cash receipts, an important indicator for equipment demand, are estimated to be about $124 billion in fiscal 2019 — the highest since fiscal 2014. Further, higher corn, wheat and cotton prices will offset softness in the soybean market.

Following the aid of $1.65 per bushel from the U.S. Department of Agriculture, dynamics for soybean will improve this year. Moreover, per the USDA’s latest available projections, net farm is anticipated to increase 10% year over year in fiscal 2019 after a decline of 16% in fiscal 2018.

Deere projects global sales for Construction & Forestry equipment to rise 13% in fiscal 2019, backed by strong demand for equipment and the Wirtgen acquisition. In forestry, global industry sales are expected to be up 5-10%, primarily driven by higher demand in EU countries and Russia.

The segment’s operating margin is projected to be about 12%. Economic environment for construction, forestry and road building industries holds promise and continues to support elevated demand for new and used equipment.
 
Wirtgen Acquisition — Key Growth Driver
 
The company 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. Deere updated its synergy target to EUR 125 million by 2022. It also completed the acquisition of PLA, which will assist it in providing innovative, cost-effective equipment, technology and services to customers.
 
Technologically Advanced Products Provide Competitive Edge
 
Deere will benefit from introduction of advanced technologies in its products. The company’s proprietary and foundational precision technologies such as guidance, telematics, onboard computing and digital operations center call for up to 20 years of investment. These foundational elements serve as key enablers for its latest advanced technologies and the combination creates the most differentiated and integrated solution in the marketplace.
 
Moreover, Deere’s efforts to expand in precision agriculture will be a game changer. In September 2017, the company acquired Sunnyvale, CA-based Blue River Technology, a pioneer in bringing machine learning to agricultural spraying equipment. Blue River’s technology aided precision agriculture by shifting farm-management decisions from the field level to the plant level.
 
Impact of Trade War
 
The implementation of tariffs and apprehensions, regarding stretched out trade talks between the United States and China, weighed on market sentiment and caused farmers to become more cautious about making major purchases. It will continue to hinder the company’s results until a resolution is reached. Further, the implementation of tariffs led to raw material cost inflation.
 
A Few Headwinds to Conquer
 
Deere will be affected by elevated expenses in fiscal 2019. It expects SA&G expenses to rise about 5% in the fiscal year. R&D expenses are forecasted to be up 5% in fiscal 2019, owing to investments in precision agriculture as well as next-generation product development programs for large agricultural product lines.

Furthermore, unfavorable impact of acquisition costs and purchase accounting related to the Wirtgen buyout will dampen earnings. The company expects an unfavorable impact of 2% for foreign-currency translation in fiscal 2019.
 
Share Price Performance

 

Deere’s shares have gained 5.8% over the past year while the industry it belongs to grew 2.9%.
 
Zacks Rank & Stocks to Consider
 
Deere currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector are Lawson Products, Inc. LAWS, DMC Global Inc. BOOM and CECO Environmental Corp. CECE. While Lawson Products currently sports a Zacks Rank #1 (Strong Buy), DMC Global and CECO Environmental carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Lawson Products has a long-term earnings growth rate of 17.5%. Its shares have moved up 28% in the past year.

DMC Global has a long-term earnings growth rate of 20%. The stock has soared 100% in a year’s time.
 
CECO has a long-term earnings growth rate of 15%. The company’s shares have gained around 61% in the past year.

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Deere & Company (DE) : Free Stock Analysis Report
 
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