Deere’s Q4’16 Earnings Beat Analyst Estimates Owing To Its Restructuring Efforts

Deere (NYSE: DE) recently reported its Q4’16 and year-end earnings and its results came in better than consensus estimates. Deere’s full-year 2016 revenues declined by about 9% but its net income beat analyst estimates amid the continued downturn in agriculture and construction industry due to Deere’s cost cutting measures. Deere’s plans to save $500 million by the end of 2016 is likely to steer it through the current weakness in the markets. Agriculture and construction industry is likely to decline marginally due to record crops in U.S. and Europe and lower levels of commodity prices globally. Deere’s construction industry sales are also facing challenges due to weakness in oil & gas sector and market uncertainties which are causing the delay in fleet replenishment. However, we expect commodity prices to improve after 2017 if the OPEC decision to cap oil production is achieved.

Deere’s Cost Cutting Measures To Steer It Through Tougher Times

Deere’s stock prices surged by about 11% following the Q4’16 earnings result, due to its better-than-expected net income for the full year 2016. Deere’s net income for the full year was down 21% to $1.5 billion but $0.3 billion above consensus estimates primarily due to its restructuring and cost cutting efforts. U.S. farm incomes are expected to be below 2009 levels again this year, due to a series of good harvests and the resulting low commodity prices. This continues to negatively impact Deere’s results as a majority of sales comes from North America.

Deere is leveraging its existing supplier relationships, reducing product-related costs and implementing workforce reduction programs such as voluntary retirement in order to cut down costs. Deere plans to save around $500 million by the end of 2018 through its structural cost reductions and has already saved $90 million in 2016. Thus, we believe that Deere will be able to generate profits for its shareholders despite the continued downturn in agriculture and construction industry.

Sales Decline In 2017 Is Likely To Be Less Severe

Deere expects a 1% decline in its agriculture and turf equipment revenues for 2017 and a marginal increase in its construction equipment sales. The U.S. farm income in 2017 is expected to be similar to that of 2016 as a slight decline in livestock will be offset by higher crop receipts due to record high harvest from last few years. We expect a marginal decline in EU-28 and China sales, due to local economic uncertainties and weakness in the dairy sector. This shold be offset, however, by increased demand from Brazil and India. The latter nation is benefitting from a good monsoon, while the latter’s government is focused on reviving growth in the agriculture sector. Overall, we expect agriculture sales to decline in 2017 but the decline will be lower than 2016 and 2015 decline.

Weakness in the construction industry has also continued due to weakness in oil and gas sector, competitive pricing environment and uncertainty in global economies. Additionally, construction contractors are delaying fleet replenishment because of the uncertain markets and decline in rental rate utilization causing increased levels of used inventory. However, we expect a marginal recovery in construction industry sales due to local government’s expected infrastructure development programs in U.S., China, and India.

We are currently reviewing our valuation model for Deere in light of recent earnings and will have an update ready soon.

For our model and valuation, please refer to our complete analysis of  Deere

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