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Deere (DE) Rides on Strong Agriculture & Construction Markets

Deere & Company’s DE results so far this fiscal have been impressive considering the ongoing supply-chain and inflationary pressures. For the first nine months of fiscal 2022, net income attributable to Deere & Company was $4.885 billion ($15.88 per share) compared with $4.680 billion ($14.86 per share) last year. This upside was led by improving conditions in both the farm and construction sectors. Backed by strong order books and positive fundamentals, DE expects demand to remain strong in fiscal 2023.

Net sales amounted to $33.565 billion in the first nine months of fiscal 2022, up 6% year over year. Production and Precision Agriculture saw a 23% increase in sales, and Small Agriculture and Turf’s segment sales rose 9% on higher shipment volumes and price realization. The Construction and Forestry segment posted a 7% increase in sales on price realization. Deere expects net income for fiscal 2022 to be between $7.0 billion and $7.2 billion.

Improving farm income, driven by recovering agricultural commodity prices, led farmers to resume investment in new equipment. This apart, the need to replace aging equipment has also been supporting farm equipment demand for a while. Deere and other agricultural equipment makers like AGCO Corporation AGCO and Lindsay Corporation LNN are benefiting from this trend.

The USDA (U.S Department of Agriculture) projects net farm income at $147.7 billion for 2022, the highest since 2013 and up 5.2% year over year. Cash receipts for agricultural commodities are expected at record levels. Receipts for soybeans are expected to be up 30.6%, for corn 16.7% and for wheat 33.7% from the prior-year levels, all led by higher prices. Combined receipts for corn, soybeans and wheat are forecast to increase $30.7 billion, accounting for the maximum rise in crop cash receipts. The upbeat outlook for corn and soybeans, the most important grains for cash crop farming, bodes well for farmer sentiment and will likely translate into better order levels for the likes of DE, AGCO and LNN.

Deere expects the Production and Precision Agriculture segment’s sales to be up between 25% and 30% in fiscal 2022 on positive price/cost. The segment’s operating margin is expected between 20% and 21%, reflecting a solid financial performance across various geographical regions. The Small Agriculture and Turf segment’s net sales are expected to be up 10-15%, while its operating margin is forecast between 14% and 15% in fiscal 2022.

DE expects industry sales of large agricultural equipment in the United States and Canada to be up roughly 15% for fiscal 2022, reflecting strong farm fundamentals. In South America, industry sales of tractors and combines are likely to go up 10-15%.

Deere is also witnessing a steady improvement in the Construction & Forestry segment. In North America, industry sales of earthmoving equipment are expected to be up approximately 10% in fiscal 2022, while the compact construction market is forecast to be flat to down 5%. Sales for the Construction & Forestry segment are projected to be up 10%, while the operating margin is likely to be 15.5-16.5% in fiscal 2022.

Gains from the Deere-Hitachi transaction and an improved price and volume will aid the segment’s margin. With the U.S. Infrastructure Investment and Jobs Act earmarking $110 billion to fund road repairs and other transformational projects over the next five years, this represents a massive opportunity for the segment. Deere’s peer Caterpillar Inc. CAT is also expected to be a major beneficiary of this stepped-up investment.

However, Deere anticipates supply-chain pressures to persist in the near term. Rising demand and COVID-19 disruptions caused capacity constraints all along the supply chain, which left Deere and other manufacturers like AGCO, LNN and CAT short of raw materials. Further, all these companies are facing significant inflation for rising material, labor and logistical costs. They have been implementing price increases for sometime to combat these headwinds.

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