Deere’s Sales To Remain Sluggish Amid Global Economic Uncertainties

Deere (NYSE: DE) will release its Q4’16 earnings on Wednesday 23rd November, prior to the market opening. We expect the results to be negatively impacted by the challenging environment in agriculture and construction equipment industry. U.S. farm incomes in 2016 are expected to be the lowest since 2009, due to a surge in corn and soybean production this year.  Bountiful harvests and depressed prices add to the multiyear downturn in commodity prices leading to stiff export competition. Strength in the U.S. dollar has also caused exports to decline over the last few years as foreign customers find alternative buying options due to currency translation losses. We expect Deere’s FY 2016 equipment sales to decline by more than 10% but Deere’s sales may rebound after next few quarters if OPEC deal to cap oil production gets signed in the next few months.

Challenging Environment in Agriculture & Construction Equipment Sales to Continue

About 66% of Deere’s Agriculture equipment sales come from North America and the downturn in the agriculture equipment industry due to weak farmer sentiment and lower commodity prices is likely to continue in the short term as U.S. farmers are expecting record production of corn and soybean this year as well. U.S. Department of Agriculture said in August that this is likely to result in about 11.5% drop in net farm incomes for 2016. The Association of Equipment manufacturers reported that sales of agricultural tractor and combines has declined by 10-20% in last 3 months in both the U.S. and Canada. We expect about 10% decline in Deere’s total equipment sales in FY 2016. Although 4-wheel drive tractor sales rebounded in October, it can be primarily attributed to seasonality, and Deere’s overall sales are expected to go down in FY Q4’16 due to declining commodity prices, the strength in U.S. dollar and stiff competition in export prices.

Construction equipment sales declined for Caterpillar and other construction equipment manufacturers declined in Q3’16. Additionally, the export of U.S. made construction equipment fell nearly 24% year on year in the first half of 2016 and this trend is likely to continue in the third quarter as well. AEM data on North American construction equipment sales also showed a decline in third quarter of 2016, implying weakness in markets. Thus, we believe that Q4’16 will be another challenging quarter for Deere.

Cost Cutting Methods and Expected OPEC Deal Brings Optimism

Deere’s stock prices surged by 13% after its Q3’16 results showed positive growth in its net income driven by Deere’s cost cutting measures. We believe that Deere’s net income will continue to grow in the coming quarters as it has already laid off about 1000 jobs and cut its capacity and is looking for ways to improve operating efficiency.

Amid the optimism on an OPEC Quota deal, which will ensure cap on production from OPEC countries, crude oil prices have started to climb after declining in October. Only blockage to this deal is Iran, which may not agree to the deal as it has recently been relieved from U.N. sanction. However, OPEC leaders are confident that this deal is likely to be reached after recent talks with Russia. If this deal gets signed, oil prices may go beyond $50 per barrel in the next few months leading to improvement in commodity prices leading to improved farm incomes.

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

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