How Will Steel Tariffs Impact Deere?

President Trump in March announced that the U.S. would levy a 25% tariff on steel imports and a 10% duty on aluminum. While Mexico, Canada, and the E.U. were exempted from this initially, this was also changed at the beginning of June. The implementation of these tariffs will no doubt increase the costs for companies like Deere (NASDAQ: DE), whose stock is down year-to-date given the negative sentiment. Deere’s Construction Industry segment, which is heavily reliant on steel prices, will be most vulnerable to these tariffs. Consequently, we expect the segment’s margins to fall roughly 120 basis points (1.2%) in the near term.

Based on the tariffs, we expect the Construction segment’s EBITDA margin to fall from about 13% to 11.5% in 2018, as a result of increased costs. This could lead to a modest valuation downside for Deere. We have summarized our expectations on our interactive dashboard platform. If you disagree with our forecasts, you can change the key drivers for Construction segment to gauge how changes will impact its expected revenue and margins.

The Construction Industry segment generates revenue from sales of construction equipment and services. Construction spending is projected to remain strong in 2018, due to the strengthening of the U.S. economy, which should boost the U.S. Housing market and construction spending. The industry is expected to grow further in 2018 which, coupled with the Wirtgen acquisition, should boost Deere’s construction business. Moreover, the increase in raw material costs, as a result of the steel tariffs, should result in a hike in prices of the goods manufactured by Deere. As a result of these factors, if the 2018 revenue rises to just under $8 billion, from an expected $7 billion earlier, it can help to offset the negative impact of falling margins.

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