Markets

Deere Downgraded to Strong Sell on Looming Headwinds

On Oct 7, 2015, Zacks Investment Research downgraded Deere & CompanyDE to a Zacks Rank #5 (Strong Sell) due to imminent concerns including low farm income, weakening conditions in the energy sector, lower commodity prices and tight credit conditions.

Why the Downgrade?

The manufacturer of agricultural, construction, forestry and consumer equipment recorded decline in earnings and sales of around 34% and 21.6%, respectively, in the third quarter of fiscal 2015, both on a year over year basis. The decline was mainly due to downturn in farm economy as well as lower demand for construction equipment.

Notably, Deere anticipates equipment sales to decrease around 21% year over year in fiscal 2015 and to be down about 24% year over year in the fourth quarter. The projection includes a negative currency-translation effect of about 4% for the full year and 5% for the fourth quarter.

On Aug 25, 2015, USDA (U.S. Department of Agriculture) projected that farm incomes will drop 36% in 2015 to $58.3 billion from 2014, due to declining crop and livestock prices. This is mainly because of falling crop prices such as corn and soybean, which will affect farm income. This will restrain farmers from purchasing new agricultural equipment, thereby impacting Deere.

Segment-wise, the company estimated Agriculture and Turf equipment sales to decline 25% in fiscal 2015 due to lower commodity prices and falling farm income, which will negatively impact agricultural machinery demand.

Deere projected sales to decline 10% in EU28 region, due to lower commodity prices and farm income as well as potential pressure on the dairy sector. In South America, industry sales of tractors and combines are expected to decline by 20% to 25% year over year due to economic uncertainty in Brazil and higher interest rates on government-sponsored financing.

Sales in the Commonwealth of Independent States are expected to be down significantly due to economic pressures and tight credit conditions. Sales in Asia are projected to be down moderately, with most of the decline centered in China and India.

Deere foresees global sales for Construction & Forestry equipment to be down about 5% in 2015 including a negative currency-translation effect of about 3%. The decline reflects impact of weakening conditions in the North American energy sector, as well as lower sales outside the U.S. and Canada. In addition, uncertainty over the 2015-2016 agriculture budget as well as concerns about possible further increases in interest rates are weighing on farmer confidence.

These factors remain headwinds for Deere. Moreover, unknown impacts from any geopolitical tensions could disrupt trade, lower production, reduce stocks-to-use ratio and result in prices quickly moving higher.

The downtrend in Deere's estimates over the past 60 days reflects the negative sentiment. The Zacks Consensus Estimate decreased 4% to $5.42 per share for 2015 and 13.5% to $4.54 per share for 2016.

Stocks to Consider

Some better-ranked stocks in the same sector include ACCO Brands Corporation ACCO , Global Brass and Copper Holdings, Inc. BRSS and Columbus McKinnon Corporation CMCO . All these stocks sport a Zacks Rank #1 (Strong Buy).

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DEERE & CO (DE): Free Stock Analysis Report

ACCO BRANDS CP (ACCO): Free Stock Analysis Report

COLUMBUS MCKINN (CMCO): Free Stock Analysis Report

GLOBAL B&C HLD (BRSS): 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 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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