On May 31, we maintained our Neutral recommendation on
agricultural and construction equipment producer
Deere & Company
). Our reiteration was primarily based on 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 third quarter.
Deere reported record second quarter 2013 earnings of $2.76 per
share, up 6% year over year. Quarterly sales also increased 9% to
$10.9 billion. Both were ahead of the respective Zacks Consensus
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.
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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 Deere's
construction equipment in the U.S. market.
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 15% to 20% from previous
expectation of 10% to 15%. 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%, 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, higher production costs associated with interim Tier
4 as well as global growth expenses will negatively impact
margins in the next quarter.
Other Stocks to Consider
Deere currently retains a Zacks Rank #3 (Hold). Other stocks in
the same industry with favorable Zacks ranks are
) with a Zacks Rank #1 (Strong Buy), while
Alamo Group, Inc.
CNH Global NV
) carry a Zacks Rank #2 (Buy).