In order to augment the production capacity of its Illinois
Deere & Co.
) intends to invest $47 million in its Moline plant. The facility
produces hydraulic cylinders which are used in the agricultural,
construction as well as forestry machines and sold across the
The company decided to upgrade the machining tools of cylinder
operations in the facility to meet the rising demand in the global
market. However, Deere has confirmed that there will not be any
addition to the work force in that facility because of this
Deere has been instrumental in expanding its production
capacity, driven by its mid-cycle sales goal of $50 billion by
2018. The company's focus now extends to the overseas markets of
China, Brazil, India and Russia.
Apart from the overseas market, Deere is also increasing its
focus on the U.S. and Canadian markets. These markets accounted for
nearly 60% of the total revenue and about 75% of the company's
profit in 2011.
Deere has been experiencing strong demand on the agricultural
front. The demand for its agricultural equipment has accelerated
with an increase in farm income globally.
The United States Department of Agriculture forecasts net farm
income to be around $91.7 billion in 2012. It is expecting a record
corn crop of 48 million tons this year, up 4.5 million tons year
over year, which will be the largest yield in the last 75
This bullish trend will be witnessed worldwide, as the global
corn production is estimated to rise 10% with several countries
posting record yields. As a result, the farmers will be encouraged
to invest in the latest machinery to maximize productivity.
Further, in February this year, the company hiked its dividend
by 5 cents a share to 46 cents per share. The hike was nearly 12%
from the prior dividend of 41 cents . Given its cash rich position,
Deere plans to increase its dividend payout ratio on an average of
25% to 35%.
However, we think margin expansion will be constrained for the
balance of 2012, given the increased costs for the Interim Tier 4
technologies and products, and higher research and development
Furthermore, Deere products use steel and other raw materials
which are facing rising cost levels. Inflated costs of raw
materials could further pressure margins. Deere expects raw
material costs to increase year-over-year in the range of $400-$500
million in 2012.
Deere faces stiff competition from companies like
CNH Global NV
). Currently, the stock retains a short-term Zacks #3 Rank (Hold).
We have a long-term Neutral recommendation on Deere.
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