Deere Fortifies Production Capacity - Analyst Blog

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In order to augment the production capacity of its Illinois facility, Deere & Co. ( DE ) 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 globe.  

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 initiative.

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 years.

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 expenses. 

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 Caterpillar Inc. ( CAT ) and CNH Global NV ( CNH ). Currently, the stock retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on Deere.


 
CATERPILLAR INC (CAT): Free Stock Analysis Report
 
CNH GLOBAL NV (CNH): Free Stock Analysis Report
 
DEERE & CO (DE): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: CAT , CNH , DE

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