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On Sep 6, we reiterated our Neutral recommendation on Deere & Company (DE - Analyst Report), a producer of agricultural and forestry equipment, construction equipment and engines.

Why Reiterated?

The U.S. Department of Agriculture is 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 be the second highest inflation-adjusted amount since 1973. Increased farm incomes have compelled farmers to continually upgrade and expand their fleet; thus leading to increased revenue prospects for Deere.

In third quarter, Deere’s Agriculture & Turf segment’s results were affected by an impairment charge for long-lived assets related to the John Deere Water operations. Deere is reviewing strategic options for John Deere Water. The division, part of Deere’s Agriculture and Turf Division, manufactures and distributes precision agricultural irrigation equipment and supplies. 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 and also continue to develop its in-field moisture sensing and climate monitoring system, known as John Deere Field Connect.

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 expects its agriculture and turf sales to grow 20% in South America due to strong market conditions and the impact of government-financing programs in Brazil.

Despite these positives, the risks surrounding the stock have forced us to maintain a neutral stance on Deere. Weakness in European markets, soft conditions in the U.K. farm sector, rising competition, weaker US outlook and government spending, additional import duty on all combines going to Russia, Kazakhstan, and Belarus and higher production costs and research and development costs associated with interim Tier 4 are detrimental to the company’s performance.

Other Stocks to Consider

Other players that are worth a mention in the industry are Alamo Group, Inc. (ALG - Snapshot Report) and Kubota Corporation (KUBTY), both carrying a Zacks Rank #1 (Strong Buy), while  Lindsay Corporation (LNN - Analyst Report) retains a Zacks Rank #2 (Strong Buy).

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