Key Takeaways From Deere Q1

by Trefis Team
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Deere‘s (NYSE: DE) posted lower-than-expected Q1 fiscal 2019 earnings on February 15th, citing higher costs for raw materials and logistics, coupled with concerns over trade policies and tariffs. The company reported revenue of $7.9 billion (+15% y-o-y) and its adjusted diluted earnings were up over 14% year-on-year to $1.54. Although Deere reported solid revenue growth – largely driven by the robust outlook of its Construction and Forestry segment – China and Europe dampened the Agricultural segment. However, a robust outlook for the Construction segment, coupled with the full year contribution of the Wirtgen acquisition and easing cost pressures, should drive 2019 results. As a result, we expect Deere’s overall revenue to grow by 6-7% in 2019.

We have an updated price estimate of $174 for Deere’s stock, which is slightly higher than the current market price. We are in the process of updating our model based on Deere’s performance in Q1. Our interactive dashboard on what to expect from Deere in 2019 details our expectations for the company’s 2019 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

Deere’s Construction and Forestry segment continued its solid performance in Q1, as sales increased by nearly 31% y-o-y to $2.3 billion. The better than expected growth was mainly due to full period contribution from the Wirtgen acquisition (vs. one month in Q1 fiscal 2018) and higher shipment volumes, partially offset by higher production costs. We expect robust construction spending to continue into 2019 as a result of strengthening U.S. economic conditions, which should drive growth in U.S. housing demand. Further, we expect the segment to benefit from 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. Consequently, we expect the solid outlook of the industry to continue to support demand for new and used equipment. As a result, we expect the segment to grow by around 10-11% in 2019.

Soft Demand To Dampen Agricultural Segment Outlook

The Agriculture and Turf segment, which accounts for nearly two-thirds of Deere’s overall revenue, grew by around 10% y-o-y in Q1 fiscal 2019. This growth was largely due to higher shipment volumes and pricing, partially offset by higher warranty-related expenses and unfavorable effects of currency translation. As a result, margins dipped by nearly 170 basis points to 7.4% mainly due to higher production, less favorable product mix 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. This, coupled with geopolitical uncertainty and ongoing trade disputes, has resulted in depressed bean prices and may result in softer demand for the company’s equipment. As a result, we expect the segment to grow by around 2-3% in 2019.

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