Deere’s ( DE ) net sales and revenues were up 2% in fiscal Q1 despite the softness in the agricultural and construction industry, and were driven largely by its broad product portfolio. Deere has also managed to increase its earnings before interest, taxes, depreciation and amortization (EBITDA) despite the industry downturn. The company’s Agriculture and Turf sales are likely to remain flat this year due to the mixed impact of lower commodity prices and increased grain stocks caused by a record harvest in 2016. On the other hand, the construction industry may grow in 2017 due to improved macroeconomic conditions and relative stability in commodity prices. Although Deere incurred losses the first quarter due to voluntary separation expenses and higher warranty costs, we believe that Deere’s margins will grow further going forward, as we discuss further below.
Agriculture and Turf Industry Sales Likely To Remain Flat This Year
Deere’s Agriculture and Turf equipment sales have declined for almost two years, primarily due to declining commodity prices globally. The record harvest in 2016 and lower commodity prices resulted in a nearly 5% decline in U.S. agriculture cash receipts. With increased levels of grain stocks, we expect the industry to remain largely flat in 2017 as commodity prices have shown signs of stabilization in the past few months. However, we expect this to be partially offset by increased demand for cotton, as indicated by the continuous decline in cotton stocks. As a result, we expect Deere’s agriculture equipment business to remain flat in 2017.
Despite significant geopolitical uncertainty such as Brexit and currency volatility, the EU agriculture industry is growing at a moderate pace. However, farm income in the region remained low due to high global grain stocks and a poor harvest in the region. We expect these to stabilize in the coming months, as the British government is pushing towards a clear policy regarding Brexit and commodity prices may increase due to improvement in oil prices . Brazil, on the other hand, is steadily growing and its agricultural production is likely to increase in the near term.
Improved Macroeconomic Conditions To Drive Construction Equipment Business
Macroeconomic factors such as GDP and employment growth in the U.S., which drive construction and forestry equipment sales, increased in the second half of 2016. Additionally, construction investment in oil and gas activity improved in the fourth quarter of calendar year 2016 after seven quarters of declines, while residential and commercial institutional construction continued to increase moderately. We expect these to continue to improve in 2017 due to the prospect of increased government spending on infrastructure projects in the U.S.
On the downside, used inventory for the construction industry is still a concern for Deere, as is sluggish economic growth in several major markets. Overall, however, we believe that construction sales likely hit their bottom in 2016 and we should see some improvements going forward.
Deere’s Profitability To Improve As Restructuring Boosts Margins
Deere’s stock price has increased by nearly 35% in the last 6 months, driven largely by improved margins as a result of the company’s cost-cutting measures. While there have been some short-term headwinds in recent months, we expect the restructuring to pay off in the coming quarters.
For more information, please refer to our complete analysis for Deere
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