Why 2015 Might Not Be A Good Year For Deere

-2.23%
Downside
411
Market
402
Trefis
DE: Deere logo
DE
Deere

Deere (NYSE: DE) has had a rough 2014 due to the decline in sales of its agricultural equipment. The slump in grain prices, such as corn, soybean and wheat, ate into farmers’ earnings, leading to a decline in demand for agricultural equipment. Though its construction equipment sales were strong during the year, it wasn’t enough to offset the decline in agricultural equipment sales. Given the strong corn and soybean production this year, it seems that Deere’s 2015 revenue will likely continue to tank, partially offset by growth in construction equipment sales.

Click here to see our complete analysis of Deere

Looking Back At 2014

Relevant Articles
  1. Should You Pick Deere Stock At $360 After 6% Fall In A Week Amid Downbeat Outlook?
  2. Down 4% This Week What’s Next For Deere Stock After Downbeat 2024 Guidance?
  3. Should You Pick Deere Stock At $380 Ahead of Its Q4 Results?
  4. Are Capital Equipment Stocks Like Deere Worth Buying Despite Rising Interest Rates?
  5. Should You Buy Deere Stock After A 10% Fall In A Week Despite Solid Q3?
  6. Is Deere Stock A Better Pick Over KO?

In 2013, favorable weather conditions helped drive up corn output by 30% year-on-year and soybean output by 8%. [1] Harvest levels continued to remain elevated in 2014. The high production levels forced prices of these crops to decline to their four year lows. The decline in crop prices negatively impacted farmers’ income since receipts from corn and soybean alone account for around 50% of crop receipts, or 28% of overall commodity receipts. [2] As their income declined, farmers were forced to put off or cancel purchases or maintenance of equipment, leading to a significant decline in sales of agricultural equipment and spare parts. This severely hurt Deere’s Agriculture & Turf division revenue, which fell 9% in the fiscal year 2014. [3]

Deere’s Construction & Forestry division benefitted from the strong growth in construction activity in the U.S. Though the segment’s revenue grew 12%, it was unable to offset the decline in Agriculture & Turf sales, leading to 5.5% decline in total revenue.

Agricultural Equipment Sales May Continue To Decline In 2015

According to recent reports by the U.S. Department of Agriculture (USDA), corn output is expected to increase by 3.5% year-on-year in 2014 and soybean by 17.9%. [4] The increase in output will likely continue to pressure crop prices in 2015. Per the USDA’s estimates, corn prices will decline to an average of $3.50 per bushel in the marketing year 2015, compared to $4.46 per bushel in the marketing year 2014. [5] The price of soybean is also expected to decline from an average of $13.00 per bushel in marketing year 2014 to $10.00 in marketing year 2015. As the prices for these crops continue to fall, sales of agricultural equipment are likely to be tempered.

Looking at its poor performance in the fourth quarter and expectations of further declines in crop prices, Deere had announced expectations of a weak FY2015 performance, forecasting a 20% year-on-year decline in Agriculture & Turf equipment sales. [6] Deere will be cutting back production in line with the expected demand. It is likely that the decline in production may hurt margins due to higher per unit fixed costs. Deere’s Agriculture & Turf margins have already been under pressure due to implementation costs related to Tier 4 engines, developed in order to ensure compliance with the new emission standards.

Construction Equipment Sales To Remain Strong In 2015

Deere’s Construction & Forestry division is poised to grow in FY2015. Given the National Association of Home Builders’ forecast of a 17.1% increase in housing starts in 2015, compared to expectations of a 6.8% increase in 2014, sales of Deere’s construction equipment are likely to grow. [7] However, given its small contribution to the company’s overall revenue, growth in the segment may not be enough to offset the decline in the Agriculture & Turf division. Deere expects its equipment sales to decline around 15% in FY2015. [6]

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Crop Production, www.usda.gov []
  2. Cash receipts by commodity rank and share of U.S. total 2012, www.usda.gov []
  3. Deere’s 2014 10-K SEC Filing, www.sec.gov. []
  4. USDA Crop Production Report, December 10, 2014, www.usda.gov []
  5. Long-term Agricultural Projections: Early Release of Commodity Tables to 2024, www.usda.gov []
  6. Deere’s FY 2014 Q4 Earnings Media Release And Financials, November 26, 2014, www.deere.com [] []
  7. NAHB Housing and Interest Rate Forecast, December 2014, www.nahb.org []