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Deere Explores Options for Irrigation Ops

DE VMI LNN ALG

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Agricultural, forestry and construction equipment maker, Deere & Company (DE - Analyst Report) is reviewing strategic options for its irrigation operations - John Deere Water. The division, part of Deere’s Agriculture and Turf Division, manufactures and distributes precision agricultural irrigation equipment and supplies.

John Deere Water is considered to be one of the world's largest full-line drip irrigation manufacturers. It operates from 24 sales and marketing locations and 19 warehousing locations in 15 countries encompassing Argentina, Australia, Brazil, Chile, China, Ecuador, France, India, Israel, Italy, Mexico, Russia, Spain, Turkey and the U.S. Its products are marketed through 700 independent dealers and distributors in over 100 countries.

John Deere Water irrigation operations came under the Deere umbrella back in 2006 with the acquisition of Calif.-based Roberts Irrigation Products. Roberts Irrigation was a manufacturer of high performance plastic micro and drip irrigation products for the agricultural, nursery and greenhouse market. The acquisition had cost Deere $41 million. The acquisition of Roberts Irrigation provided Deere the opportunity to grow its new business initiative in precision water systems.

Given that effective water management remains a pressing need for agriculture, Deere will continue to focus on products and services to help customers better manage agronomic activities in the field. Deere will also continue to develop its in-field moisture sensing and climate monitoring system, known as John Deere Field Connect. This was one of the focal points in the company's John Deere FarmSight strategy launched in Nov 2011, to provide integrated solutions in the areas of machine optimization, logistics optimization and agricultural decision support, enabling additional productivity enhancements through machine connectivity and intelligence. These include user-friendly monitors, sensors and wireless networks for machinery, and agronomic data to aid operational decision making.

Deere’s agriculture and turf segment manufactures and distributes a full line of agricultural and turf equipment and related service parts. The segment contributed 75% of Deere’s sales in 2012 and 78% of sales in the first none months of 2013. In the third quarter of 2013, the segment’s results were affected by an impairment charge for long-lived assets related to the John Deere Water operations. Deere recognized a $50 million pre-tax (or $44 million after-tax) charge for the unit due to a decline in the forecasted financial performance.
 
Other than Deere, Valmont Industries, Inc. (VMI - Analyst Report) and Lindsay Corporation (LNN - Analyst Report) command about 70 to 75% of the irrigation machinery market. The sale of the John Deere Water operations will be a win-win situation for both participants.

The agriculture sector is in for a boom with the U.S. Department of Agriculture (USDA) forecasting a record net farm income of $120.6 billion in 2013, a 6% year-over-year rise triggered by record crop production. This will boost farm equipment sales for Deere. Given the increased global demand for food, shelter and infrastructure, we believe that the long-term outlook for Deere remains compelling. Deere’s sales are expected to benefit from global expansion and lines of advanced new equipment. However, continued weakness in the European markets remains concern.

Deere currently holds a Zacks Rank #3 (Hold). For investors keen on the industrial products sector, Alamo Group, Inc. (ALG - Snapshot Report) with a Zacks Rank #1 (Strong Buy) is a good option.
 

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