Key Takeaways From Deere’s Q4

by Trefis Team
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Deere (NYSE: DE) announced its Q4 earnings on November 21, missing on both revenue and earnings estimates. The company reported revenue of $9.4 billion (+17% y-o-y) and its adjusted diluted earnings were up over 40% year-on-year. The weaker than expected results were largely due to tepid performance of its Agriculture division, offset by robust construction equipment sales coupled with the contribution from its acquisition of Wirtgen. Further, the ongoing trade war between U.S. and China has weakened farm commodity prices. Consequently, we expect lower demand for its agricultural equipment. However, robust outlook of the Construction segment, coupled with full year contribution from Wirtgen should drive the Construction and Forestry segment. As a result, we expect Deere’s overall revenue to grow by 5-6% in 2019.

Our price estimate for Deere stands at $177, which is now significantly higher than the market price. We are in the process of updating our model based on the FY 2019 guidance provided. Below we discuss some of the key factors which impacted the company’s earnings. With our interactive dashboard, you can modify different driver assumptions, and gauge their impact on the company’s revenue and valuation.

Construction Segment To Drive Growth

Construction and Forestry sales increased 78% y-o-y to over $10 billion in fiscal 2018. The robust growth was mainly due to the Wirtgen acquisition, coupled with higher shipment volumes and lower warranty claims. We expect robust construction spending to continue into 2019 as a result of strengthening of the U.S. GDP, which should drive growth in U.S. housing demand. Further, we expect the segment to benefit from the improved transportation investment, economic growth worldwide, and increased demand for its forestry equipment in the U.S. Moreover, the full year contribution from Wirtgen should further boost Deere’s Construction business in 2019. As a result, we expect the segment to grow by around 10-11% in 2019.

Ongoing Trade War To Dampen Agricultural Segment Outlook

The Agriculture and Turf segment, which accounts for nearly two-thirds of Deere’s overall revenue, grew by around 15% y-o-y in fiscal 2018. The solid growth was largely due to lower warranty claims, higher shipment volumes and pricing. Despite this, margins dipped by nearly 20 basis points to 11.8% mainly due to higher production and increased research and development costs. Further, Deere’s host of new acquisitions should not only expand its market position but also enable the company to provide cost-effective equipment, technology, and services to farmers. Agricultural mechanization in developing countries coupled with higher demand for food due to rising population should drive demand for its agriculture equipment. However, the ongoing trade war coupled with geopolitical uncertainty has resulted in depressed bean prices and therefore should result in softer demand for its equipment. As a result, we expect the segment to grow by around 3-4% in 2019.

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