What 2017 Holds For Deere: Deere’s Businesses To Remain Flat But Margins May Grow

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Deere’s (NYSE: DE) industrial businesses continued to shrink in 2016, but the decline was less severe compared with 2015 decline. Deere’s EBITDA margin improved over the past few quarters due to its restructuring and operational efficiency efforts. We believe that Deere’s margins will continue to improve in 2017 as its restructuring efforts will pay off this year. Deere’s revenues may decline marginally due to the weakness in the U.S. and Europe’s construction and commodities industries, but will be offset by stable agriculture and turf equipment sales from North America. Our estimate for Deere’s agriculture and turf equipment division sales has a further upside potential of 15% if commodity prices improve in 2017 due to the OPEC deal to limit supply. However, China and Europe continue to remain a threat for Deere’s industrial sales, as the economic uncertainties still continue in the region.

Deere’s Margins Will Improve As The Company Is Likely To Avert Revenue Decline In 2017

Deere’s construction industry sales are expected to continue its decline in 2017 due to tight lending standards for construction loans, growing material and labor costs and uncertainty around government construction spending in North America. Despite this, we expect Deere to avert its revenue decline in 2017 driven by the stability in its agriculture and turf equipment sales observed in the last few quarters. The slight decline in livestock will be offset by higher crop receipts due to record high harvests in the last few years. China and EU sales are expected to remain sluggish due to the local economic uncertainties and weakness in the dairy sector.  However, they are likely to be offset by increased demand from Brazil and India. The latter nation is benefiting from a good monsoon season and the fact that the Indian 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 those in 2016 and 2015.

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Deere’s EBITDA margins may go up marginally in 2017 due to its restructuring and cost cutting efforts. 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.

Commodity Prices May Finally Improve On The Back Of OPEC Deal

Crude oil prices are already approaching $55 a barrel after the announcement of OPEC deal to cap their oil production in November 2016. If this trend continues in 2017 and prices cross $65 per barrel, global commodity prices may regain its 2015 levels. U.S. export may go up in 2017 due to the record harvest in U.S. in the last couple of years. This, in turn, will result in improved farm incomes and new construction starts in 2017. If this happens, dealers will stock up their inventories and Deere’s industrial sales may witness mid-single digit growth in 2017 itself.

China And Europe Will Be The Key Markets To Look For In 2017

China and Europe will be the key markets to watch for in 2017 as the growth of construction and machinery equipment are heavily dependent on these markets. The Brexit vote took the world by surprise and negatively impacted the construction industry growth in whole Europe in 2016. As the negotiation period for the withdrawal of the EU agreement will end in 2018, the uncertainty around the trade model which the U.K. will follow continues. If U.K. decides not to follow WTO model after Brexit is enforced, Deere’s revenues from the region may decline further. Economic instability of Chinese economy has the potential to drive the world into a mild recession, if not a major one. Thus commodity prices will also be dependent on the growth of Chinese economy in 2017.

 

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively.

For precise figures, please refer to our complete analysis for Deere & Company.

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