How Much Will Construction & Forestry 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. Further, lower shipment volumes dampened the Construction segment. However, a favorable sales mix, recovery in commodity prices, and improved demand for its agricultural and construction equipment helped boost its top line in 2017, with revenue growing by over 11%. The Construction & Forestry segment contributes nearly 20% of the company’s overall revenue and the segment revenue fell by at nearly 1% 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 Construction & Forestry segment will contribute just over 25%, or $1.4 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.

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. This growth, coupled with the Wirtgen acquisition, should boost Deere’s Construction business in the coming years. The implementation of the tariffs on steel and aluminum will no doubt increase the costs for Deere’s Construction Industry segment, which is heavily reliant on steel. 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.

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