How Much Will Agriculture & Turf Segment Contribute To Deere’s Top Line Growth?

by Trefis Team
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Deere (NYSE: DE) has performed modestly over the past couple of years. The company saw its revenue fall by just under 8% between 2015-2016, largely due to the weakness in commodity prices and high grain stocks in North America. However, a recovery in commodity prices, improved demand for its agricultural equipment, and a favorable sales mix helped boost its top line in 2017, with revenue growing by over 11% in 2017. The Agriculture & Turf segment contributes nearly 70% of the company’s overall revenue and was the second fastest growing segment, at under 2% annually between 2015-2017.

Based on recent market trends and the near-term outlook provided by the company’s management, we forecast Deere to report 8-9% annual revenue growth in the next two years, from $33.5 billion in FY 2018 to about $39 billion in FY 2020. Of the estimated $5.4 billion incremental revenues, we estimate that Agriculture & Turf segment will contribute just over two-thirds, or $3.6 billion. We have summarized our expectations on our interactive dashboard on Deere’s revenues. If you disagree with our forecasts, you can change the key drivers for Agriculture & Turf segment to gauge how changes will impact its expected revenue.

Estimates for Key Growth Drivers

The Agriculture & Turf segment contributes nearly 70% of the company’s overall revenue and grew at under 2% annually between 2015-2017. Agriculture & Turf revenue actually fell in 2016, as a result of weakness in commodity prices and high grain stocks in North America. The segment’s 2017 revenue improved significantly, as a result of recovery in commodity prices and improved demand for its agricultural equipment.

Deere expects further improvement in the Agriculture segment, driven by strong order activity – increased replacement demand and demand for new equipment. Further, its most recent acquisition of Blue River Technology should help farmers reduce costs by decreasing the use of herbicides, which could lead to increased demand for its crop spraying equipment and provide decent long-term benefits. We expect the positive outlook for Deere in the near term, driven by improving conditions of the agriculture market, and increased global food consumption, will likely spur demand for its agriculture products. However, the possibility of a potential trade war may have an adverse effect on commodity prices and slightly dampen the outlook of Deere’s Agriculture & Turf segment.

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