Deere & Company (DE - Free Report) has been witnessing encouraging improvement over the past few quarters, majorly driven by upbeat agricultural and construction equipment markets and focus on acquisitions. However, challenges in Argentina and elevated expenses remain headwinds.
The company, with a market capitalization of approximately $47.5 billion, currently carries a Zacks Rank #3 (Hold). It has an estimated long-term earnings growth rate of 9%.
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Deere
Deere has outperformed the industry it belongs to over the past six months. The company’s shares have gained around 6% compared to 3% growth recorded by the industry.
Looking at Deere’s price-to-earnings ratio, shares are underpriced at the current level, which seems to be attractive for investors. The company has a trailing P/E ratio of 15.9, which is below the industry average of 17.2.
Growth Drivers in Place
For fiscal 2019, Deere anticipates net sales to increase about 7% year over year and projects net income of about $3.6 billion. The company remains well positioned to grow on the back of positive agricultural and construction equipment markets.
With the rapidly increasing adoption rates for technology, the company is keeping pace, organically and inorganically, to further extend its leading position in precision agriculture. 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 the field level to the plant level.
Further, the company acquired the world’s leading road-construction equipment maker — Wirtgen — in December 2017. The buyout significantly enhanced 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 2022. The Wirtgen acquisition will contribute about 2% to net sales for fiscal 2019. Deere has also completed the acquisition of PLA which will assist it in providing innovative, cost-effective equipment, technology, and services to customers.
Headwinds for Deere
In the EU28 region, revenues are forecast to be approximately flat as a result of drought conditions in key markets in fiscal 2019. In South America, industry sales of tractors and combines are projected to be flat to up 5%, benefiting from strength in Brazil. However, Deere expects that sales growth in Argentina will likely remain challenged in the near term as the country battles high inflation and political uncertainty.
Again Deere will be affected by elevated expenses in fiscal 2019. It expects SA&G expense to flare up about 7% for the fiscal. Furthermore, unfavorable impact of acquisition cost and purchase accounting related to the Wirtgen buyout will dampen earnings. Also, unfavorable raw material prices and higher freight cost remain headwinds.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Stocks to Consider
Some better-ranked stocks in the same sector are Brady Corporation (BRC - Free Report) , Bemis Company, Inc. (BMS - Free Report) and Enersys (ENS - Free Report) . All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Brady has a long-term earnings growth rate of 7.5%. The company’s shares have climbed 12% over the past six months.
Bemis has an estimated long-term growth rate of 7.3%. Its shares have rallied 8% over the past six months.
Enersys has a projected long-term growth rate of 10%. Its shares have gained 5% over the past six months.
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