We maintain our Neutral recommendation on
Deere & Co.
). The quantitative Zacks #3 Rank (short-term Hold rating)
for the company indicates no clear directional pressure on the
shares over the near term.
Deere delivered earnings of $2.61 per share in the second
quarter and worldwide total sales of $10 billion, both ahead of the
respective Zacks Consensus Estimates. Deere expects equipment sales
to grow around 15% in fiscal 2012. The guidance includes an
unfavorable currency-translation impact of 3%. Net income is
projected at $3.35 billion, up from the previous expectation of
Deere is riding a wave of strong demand for agricultural
commodities and increase in farm income globally. The United States
Department of Agriculture forecasts net farm income to be at $91.7
billion in 2012. It is expecting a record corn crop of 48 million
tons this year, up 4.5 million tons year on 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. This will encourage farmers to invest in the
latest machinery to maximize productivity, favoring Deere and other
companies in this space.
Deere is focusing on extending its global presence in a big way.
The company is extending its manufacturing footprint in the
overseas markets of China, Brazil, India and Russia. The expansion
in the emerging markets should provide long-term growth
Population growth and increase in living standards in the
emerging markets are fueling growth in the global food
demand. In addition to growing its footprint in the overseas
markets, Deere is also increasing its focus on the U.S. and
Canadian markets. This area generated nearly 60% of the total
revenues and about 75% of the company's profit in 2011.
Deere's sales will also be supported by the launch of a range of
advanced new products. In 2011, Deere introduced a record number of
products, most of which featured improvements in power, comfort and
performance. The new products include premium combines, the most
powerful line of John Deere tractors ever made, that set standards
for capacity and productivity.
Other new products launched in the market are the largest-ever
self-propelled sprayers, one of which has a 120-feet boom. New
models of construction equipment include advanced excavators,
productive dozers and loaders with hybrid electric drivetrains.
On the flipside, Deere has to comply with the Final Tier 4
emission standards. Meeting these standards will require a
significantly new and expensive technology. There also remains the
risk of higher-than-normal maintenance and repair costs with the
implementation of the Interim Tier 4 products.
The increased costs for the Interim Tier 4 technologies and
products, higher research and development expenses and inflated
costs of materials could put further pressure on margins in 2012.
Furthermore, sales in South America will be affected due to the
drought in Argentina and southern Brazil, as well as the uncertain
agricultural policy environment in Argentina.
Illinois-based Deere & Co. is engaged in the production and
distribution of agricultural and forestry equipment, construction
equipment and engines worldwide. The company sells its products in
the U.S. and Canada through branch offices as well as through
distributors and dealers for the resale of products
internationally. Deere competes with
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