Deere’s Sales To Remain Sluggish In Short Term But Long Term Drivers Still Intact

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Deere and Company (NYSE: DE) reported its Q3 FY 16 earnings on 19th August 2016, and the revenues were $500 million above analyst estimates. The current downturn in the global agricultural and construction industry due to lower commodity prices and economic uncertainty, has negatively impacted Deere’s performance in the past couple of years, and Q3 FY 16 was no different. The company’s sales and net income declined both sequentially and year-to-date in Q3 FY 16 as the commodity price levels are at a lower level as compared to its 2015 numbers. While the short-term outlook looks weak owing to the declining commodity prices, the slowdown in the Chinese economy and overall low farmer confidence, Deere’s long-term growth potential remain strong due to increasing world population and migration from rural to urban areas, which will result in increased demand for agriculture and construction, respectively.

 

Agriculture and construction equipment sales to remain sluggish in short term

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Deere’s agricultural and construction equipment sales declined by 14% and 24%, respectively, in the third quarter, owing to weak demand in North America and China, along with short term uncertainties in the global economy such as the slowdown of the Chinese economy and the Brexit vote. However, Deere’s agriculture and turf equipment operating profit was up about 21% due to a gain on the sale of its partial interest on SiteOne, lower production costs, and lower SG&A. Deere observed that production/consumption has been very sensitive to weather conditions in the U.S. for the past few quarters. If the weather, which remained favorable for about four consecutive years, still remains favorable in the short term, then we may witness some improvement in agricultural equipment sales.

 

Deere’s businesses could see a revival post 2017

Deere’s Agriculture and Construction segment may start improving from 2017 onward owing to the expected stability in commodity prices, due to improved crude oil prices in 2016 and increased demand in order to fulfill the food requirements of ever increasing world population. Also, we expect Deere’s market share to increase in developing markets, such as India, which have huge opportunity for growth in the next few years.

In the construction industry, Brazil, Canada, and Europe are expected to revive post 2016 leading to more housing starts and increased demand for new construction equipment.  Expected revival of China’s economy around 2018 and Deere’s increasing presence in other developing markets will be pivotal to Deere’s future performance.

 

For more information, please refer to our complete analysis for Deere & Company

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