Deere (DE) Poised for Growth, Weak Agricultural Sector a Drag

On Sep 5, we issued an updated research report on Deere & CompanyDE .

The agricultural equipment maker is poised to benefit from increased global demand for food, shelter and infrastructure as well as an improvement in political conditions in Brazil. However, unfavorable foreign currency movements, a weak agricultural sector and sluggish economic growth remain headwinds for the company.

For fiscal 2016, Deere anticipates net income to be about $1.35 billion, up from the prior estimate of $1.2−$1.3 billion. The company remains optimistic about the long term, based on steady investments in new products and geographies. Further, favorable trends derived from a growing, more affluent and increasing population and rising living standards will provide ample opportunity for growth.

Notably, Brazil announced an increase in rates for government-sponsored finance programs. This means that rates per Moderfrota will rise from 7.5% to 8.5% for small and mid-sized farmers, and from 9% to 10.5% for large farmers. While the rates are being hiked, they remain below the level of inflation in Brazil. This announcement is a positive indicator. It removes an element of uncertainty for farmers, and conveys confidence that the government will continue to support agriculture in spite of the economic and political challenges in the region.

Further, the U.S. Architecture Billings Index (ABI), an economic indicator that provides an approximate 9-to-12-month glimpse into the future of non-residential construction spending activity, has remained above 50 in recent months, signaling robust conditions ahead for the industry. This bodes well for Deere too.

However, Deere projects total equipment sales to decline 10% year over year in fiscal 2016. For the fourth quarter of fiscal 2016, sales are likely to deteriorate about 8% from the year-ago quarter.

The company expects Agriculture and Turf equipment sales to decline 8% in fiscal 2016. Low commodity prices, low farm incomes and elevated used equipment levels in the U.S. and Canada continue to strain demand for farm equipment, especially high-horse power models. Industry sales for agricultural equipment in the U.S. and Canada are expected to be down 15%−20% in fiscal 2016. In the EU28, sales are projected to be flat to down 5% due to low commodity prices and farm income, including potential pressure on the dairy sector.

Deere foresees global sales for Construction & Forestry equipment to be down about 18% in fiscal 2016. Rental utilization rates continue to decline, leading to a reduction in fleet sizes and higher levels of used equipment. Also, housing starts in the U.S. for single-family homes, which require more earth-moving equipment, remain well below the long-term average.

Moreover, a weak oil and gas sector, with the impact most pronounced in the energy-producing regions of the U.S. and Canada will impact Deere's results.

Deere currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same sector are Berry Plastics Group, Inc. BERY , Columbus McKinnon Corporation CMCO and DXP Enterprises, Inc. DXPE . All these stocks sport a Zacks Rank #1 (Strong Buy).

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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 Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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