Deere (DE) Poised To Grow Despite Weak Agricultural Sector

We issued an updated research report on Deere & Company (NYSE:DE) on Jul 5, 2016. The agricultural equipment maker is poised to benefit in the long term on the back of increased global demand for food, shelter and infrastructure. Further, improvement in political conditions in Brazil and a positive Indian agricultural outlook will drive growth. However, unfavorable foreign currency movements, a weak agricultural sector and sluggish economic growth remain headwinds for the company’s growth.

Deere remains optimistic about the long term, based on steady investments in new products and geographies. It expects robust profits, backed by increased global demand for food, shelter and infrastructure. Further, favorable trends derived from a growing, more affluent and increasing population and rising living standards will provide ample opportunities for long-term growth.

Additionally, Brazil announced details of eligible rates for government-sponsored finance programs. Rates per Moderfrota will increase from 7.5% to 8.5% for small and mid-sized farmers and from 9% to 10.5% for large farmers. While the rates are being hiked, they remain below the level of inflation in Brazil. This announcement is a positive indicator. It removes an element of uncertainty for farmers, and conveys confidence that the government will continue to support agriculture in spite of the economic and political challenges in the region.

In India, the government continues to provide assistance to the agricultural sector with programs such as minimum support prices for commodities, irrigation and crop insurance. Growth in the economy is outpacing other emerging markets and attracting foreign investments. This year’s monsoon is expected to provide above-average moisture after two years of below-normal seasons. These factors are resulting in improved industry demand in India. These positive factors will augment Deere’s growth.

However, Deere reduced its fiscal-year forecast for net income to $1.2 billion due to ongoing market pressures. It projects total equipment sales to decline 9% year over year in fiscal 2016. Sales are also likely to deteriorate about 12% from the year-ago quarter in third-quarter fiscal 2016.

The company expects Agriculture and Turf equipment sales decline of 8% in fiscal 2016, including an unfavorable currency-translation impact of about 2%. Industry sales for agricultural equipment in the U.S. and Canada are expected to be down 15%−20% in fiscal 2016 owing to low commodity prices and stagnant farm income. In the EU28, sales are projected to be flat to down 5% due to low commodity prices and farm income, including potential pressure on the dairy sector.

Again, the USDA projected flat farm income for 2016. This remains a drag for Deere’s performance along with its peers including AGCO Corporation (NYSE:AGCO) , Titan International Inc. (NYSE:TWI) and Lindsay Corporation (NYSE:LNN) in the machinery-farming industry.

Further, in South America, Deere’s industry sales of tractors and combines are expected to decrease 15%−20% year over year due to economic uncertainty in Brazil. Sales in Asia are projected to be flat to down modestly, largely because of the weakness in China.

Deere foresees global sales for Construction & Forestry equipment to be down about 13% in fiscal 2016. The decline reflects the impact of soft conditions in the North-American energy sector. In forestry, global sales are expected to be down 5%−10% from year-ago levels. The outlook for net income from Financial Services has been slashed to $480 million which reflects less-favorable financing spreads, higher losses on lease residual values and an increased provision for credit losses.


DEERE & CO (DE): Free Stock Analysis Report

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