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Farming Innovations Aid Deere Amid Poor Agricultural Market

On Dec 4, we issued an updated research report on Deere & Company DE. Acquisitions, introduction of advanced technologies in its products and efforts to expand in precision agriculture are key growth drivers for the company. However, trade tensions, low commodity prices and lower spending on new farm equipment will likely dent the company’s top-line growth in the near term.  

Let's illustrate the factors in detail.

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 right on track and the company is focused on realization of synergies. Deere 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 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, easier and more precise across the production process. Consequently, Deere continues to invest in technology leadership and data analytics. Moreover, the company's efforts to expand in precision agriculture will be a game changer. Notably, precision technology will spur customers’ demand for replacing age-old fleet equipment.

Margin-Expansion Plan to Drive Growth

Deere is assessing its cost structure by reviewing organization efficiency and footprint assessment, which, in turn, will help improve margins. The company is expected to drive $150-MILLION synergy benefits from restructuring activities in fiscal 2020. It will also focus on driving capital-allocation decisions that further prioritize products and services, as well as advance solutions offerings, while also accelerating after-market parts and services.
Also, Deere has taken actions to reduce inventory and enhance its positions in the current leasing portfolio and overall leasing strategy. This will increase long-term sustainability of the leasing business model.

Few Headwinds to Counter:

Suppressed Equipment Demand Hurt Top Line

Low commodity prices, dismal farm incomes, poor growing and harvesting conditions, and the trade war have affected U.S farmers’ new equipment purchases. This continues to put pressure on Deere’s top line. The company anticipates Agriculture and Turf equipment sales to be down between 5% and 10% in fiscal 2020 due to under-production of small agricultural equipment. Further, industry sales of agricultural equipment in the United States and Canada are anticipated to be down 5%, year over year, for fiscal 2020, due to lower large-equipment demand.

Moreover, the company's leasing business had a sharp profit decline due to falling residual values. Sales for the EU28-member nations will also remain flat, as most regions in the EU28 countries are expected to recover with favorable production in 2019, which were impacted by last year’s drought. The South American industry sales of tractors and combines are projected to be flat, as strength in Brazil will be offset by weak performance in Argentina, thanks to political and economic uncertainties. Additionally, sales in Asia are forecast to be flat, with sluggishness in China muting growth in India.

Tepid Fiscal 2020 View & Poor Construction Market

For fiscal 2020, Construction & Forestry segment sales will likely be down 10-15% compared with the prior fiscal year. This downside reflects underproduction of retail volume. The segment is also expected to witness decline thanks to sluggish construction activity and the company’s efforts to manage inventory levels.

Deere anticipates net income of $2.7-$3.1 billion for fiscal 2020, lower than the prior estimate of $3.6 billion. Trade uncertainties and waning demand resulting from wet spring weather and delayed planting resulted in lower corn and soybean production in the United States. These factors strained grain supplies throughout fiscal 2019. Furthermore, Deere’s results will continue to bear the brunt of higher raw-material costs on account of tariff implementations.

Deere & Company Price and Consensus

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Sharps Compliance Corp SMED. All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 52.3% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 38.2% over the past year.

Sharps Compliance has an outstanding estimated earnings growth rate of 500% for the ongoing year. In a year’s time, the company’s shares have gained 30.9%.

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