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Precision Agriculture Drives Deere (DE) as Costs Flare Up

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On Aug 28, we issued an updated research report on Deere & Company (DE - Free Report) . The company is anticipated to benefit from its focus on precision agriculture and strategic acquisitions. Positive outlook for its Construction & Forestry equipment segment also bodes well. However, concerns in the agriculture business and elevated expenses are expected to impact results.

Let’s illustrate these factors in detail.

Deere to Gain From Focus on Precision Agriculture

Deere's focus on precision agriculture will be a catalyst. The Intelligent Solutions Group (ISG) is the company’s premier development facility specializing in creating technology used in maximizing crop yields and improving food production infrastructure. In collaboration with its product platforms, the ISG facility has been advancing Deere's precision agriculture strategy and leading the industry in machine optimization, job execution and mobile management for farmers. Moreover, the company has been aggressively investing in its portfolio of ISG tools, including precision hardware, telematics, digital solution and advanced customer support.

Acquisitions Drive Deere’s Growth

Over the last three years, Deere has effectively utilized M&A to help execute crop care strategy, completing four acquisitions, including Monosem, Hagie, Mazzotti, and King Agro. In September 2017, Deere acquired Sunnyvale, CA-based Blue River Technology. Blue River’s technology has aided precision agriculture by shifting farm-management decisions from field level to plant level.

Further, the company acquired the world’s leading road-construction equipment maker — Wirtgen — in December 2017. The buyout significantly enhances Deere's exposure to global transportation infrastructure. Wirtgen’s integration is well underway with the Deere-Wirtgen team working toward the synergy target of EUR 100 million by fiscal 2022. Finally, Deere signed a definitive agreement to acquire PLA, a privately-held manufacturer of sprayers, planters, and specialty products for agriculture, in July 2018. The acquisition will assist Deere in providing innovative, cost-effective equipment, technology, and services to customers.

Upbeat Construction & Forestry Segment

Deere predicts global sales for Construction & Forestry equipment to soar 81% for fiscal 2018. The Wirtgen acquisition is likely to add about 55% to sales of the segment. The outlook is based on global economic growth, higher housing starts in the United States, and an improved oil and gas sector. Again, economic environment for the construction, forestry and road building industries bodes well, and continues to support elevated demand for new and used equipment.

Additionally, construction investment is estimated to rise 2.9% in fiscal 2018, led by increased activity in oil and gas. Deere projects oil prices to be around $67 a barrel for the fiscal. In addition, backlogs for many oilfield contractors are extending through fiscal 2019, which will boost equipment demand.

Headwinds in the Agriculture Business

Deere’s agriculture business will be hurt in fiscal 2018 by expectations of high global grain and oil seed stocks-to-use ratios. This is because abundant crops have offset strong demand around the world. In addition, the corn stocks-to-use ratio is expected to decline in response to the rising global demand and drought conditions experienced during the first crop in Argentina, which lowered the country's corn production by roughly 25%. Moreover, the wheat stock-to-use ratio is projected to decline in response to intensifying drought conditions in Europe, Australia and the Black Sea region.

Elevated Costs to Impede Profit

Deere will bear the brunt of elevated expenses in fiscal 2018. The company believes an unfavorable product mix, higher overhead spending and increased incentive compensation will dampen margins. It also forecasts selling, general and administrative expense to flare up about 16% for the fiscal. Furthermore, unfavorable impact of acquisition cost and purchase accounting related to the Wirtgen buyout will hurt earnings. Also, unfavorable impacts of raw material prices, elevated freight cost, emissions costs, incentive compensation, voluntary separation expenses and pension, and OPEB expense remain headwinds.

Share Price Performance

Deere has outperformed the industry with respect to price performance, over the past year. While the stock has appreciated 27%, the industry recorded growth of 21%.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the same sector are W.W. Grainger, Inc. (GWW - Free Report) , iRobot Corporation (IRBT - Free Report) and Atkore International Group Inc. (ATKR - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Grainger has a long-term earnings growth rate of 12.5%. Its shares have appreciated a whopping 130%, over the past year.

iRobot Corporation has a long-term earnings growth rate of 19.5%. The company’s shares have gained 27% in a year’s time.

Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 69% in a year’s time.

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