On Mar 15, we maintained our Neutral recommendation on
agricultural and construction equipment producer
Deere & Company
( DE), on the basis of expected benefits from strong farm
incomes, recovery in construction sector and strength in Brazil,
offset by concerns regarding weakness in Europe, additional
import duty imposed in Russia, Kazakhstan and Belarus, and volume
and margin headwinds in the second quarter.
Deere reported record first quarter 2013 earnings of $650
million or $1.65 per share, up 27% year over year. Quarterly
sales also increased 10% to $7.42 billion. Both were ahead of the
respective Zacks Consensus Estimates.
As per the U.S. Department of Agriculture, U.S. farm income
will be a record $128.2 billion in 2013, up 14%. This will be
driven by high market prices and crop insurance payments that
will offset losses from the drought. Prices for corn, wheat and
soybeans are projected to remain historically high and above the
pre-2007 levels. Relatively high commodity prices and strong farm
incomes are expected to continue to sustain demand for farm
machinery during the year.
Both the non-residential and residential construction sectors
are showing signs of a much awaited turnaround. This, in addition
to the new highway bill, will improve demand for construction
equipment in the U.S. market. Deere's 2013 growth forecast of 3%
for the Construction & Forestry segment may prove to be
conservative in this scenario.
Deere is investing to increase its market share in Brazil.
Value of agricultural production in Brazil is expected to rise 9%
annually in 2013. Deere raised its agriculture and turf sales
growth forecast for South America to 10% to 15% from the previous
expectation of 10%. This was driven by strong market conditions
and growth in government subsidies in Brazil.
On the flipside, Deere expects agriculture and turf sales for
Europe to be down 5%, compared with the previous expectation of
flat to down 5%, due to weakness in the overall economy and poor
harvest in the U.K last year. In the forestry sector, further
weakness in the European markets is expected to offset higher
demand in the U.S.
Effective Feb through Jul 2013, an additional 27.5% import
duty has been placed on all imported combines going to Russia,
Kazakhstan, and Belarus, thus bringing the import duty to 32.5%.
This is expected to have an adverse impact on sales of imported
combines in these countries.
Furthermore, Deere expects lower manufactured volume in the
second quarter compared with last year. Higher production costs
associated with interim Tier 4 as well as global growth expenses
will negatively impact margins in the quarter.
Other Stocks to Consider
Deere currently retains a Zacks Rank #2 (Buy). Other stocks in
the same industry with favorable Zacks ranks are
Alamo Group, Inc.
Briggs & Stratton Corporation
CNH Global NV
), which carry a Zacks Rank #2 (Buy).
ALAMO GROUP INC (ALG): Free Stock Analysis
BRIGGS & STRATT (BGG): Free Stock Analysis
CNH GLOBAL NV (CNH): Free Stock Analysis
DEERE & CO (DE): Free Stock Analysis
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