What To Expect From Deere In Q1

Despite missing consensus estimates, Deere (NYSE: DE) had an overall solid fiscal 2018 (year ended October 2018). We expect the company’s recent growth to continue when it reports its fiscal first quarter earnings on February 15. We expect this growth to be primarily driven by a robust performance from its Construction and Forestry segment – led by enhanced demand for its equipment, as well as the Wirtgen acquisition. However, the lingering U.S.-China trade tensions should slightly dampen its Agriculture and Turf segment. Below we take a look at what to expect from Deere’s Q1.

We have a $178 price estimate for Deere’s stock, which is slightly higher than the current market price. Our interactive dashboard on what to expect from Deere in Q1 details our expectations for the company’s Q1 earnings. You can modify the charts in the dashboard to gauge the impact that changes in key drivers for Deere would have on the company’s earnings and valuation, and see all of our Industrials company data here.

Construction Segment To Drive Growth

Construction and Forestry accounts for nearly 27% of Deere’s overall sales, and those revenues increased significantly to over $10 billion for fiscal 2018. The growth was largely due to the Wirtgen acquisition, coupled with higher shipment volumes and lower warranty claims. We expect these trends to carry over into fiscal 2019 as a result of improving economic conditions in the U.S. – which should drive growth in the housing market. In addition, we expect the segment to benefit from increased transportation investment, economic growth worldwide, and improved demand for its forestry equipment in the U.S. As a result, we expect elevated demand for both its new and used equipment – largely due to the strong outlook of the construction, forestry, and road building industries. This, coupled with full year contribution from the Wirtgen acquisition, should drive growth for the segment this fiscal quarter and year.

Soft Demand Should Dampen Agricultural Segment Growth

Better-than-expected shipment volumes and pricing, coupled with lower warranty claims, helped boost Deere’s Agricultural and Turf sales in 2018. The segment’s revenues improved by around 15% y-o-y to just over $23 billion for the year. Despite this, margins dipped to 12.1% (down 30 basis points) mainly due to higher production and increased research and development costs. Further, agricultural mechanization in developing countries, coupled with higher demand for food due to a rising population, should drive replacement demand for its large equipment and continued demand for its small tractors. In addition, its multiple strategic partnerships should not only expand its market position but also enable the company to provide cost-effective equipment, technology, and services to farmers. However, the ongoing U.S.-China trade dispute, including China’s stance of shunning U.S. soybean imports, has resulted in depressed bean prices and inflated inventories. Owing to these factors, we expect softer demand for Deere’s agricultural equipment, and we forecast the segment to grow by around 3-4% in fiscal 2019.

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