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Deere Strong on Farm Income, Construction Segment a Sore Spot

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On Mar 3, 2020, we issued an updated research report on Deere & Company DE. Growing U.S farm income in 2020 bodes well for agricultural equipment demand. Acquisitions, introduction of advanced technologies in its products and efforts to expand in precision agriculture will drive growth. However, the Construction & Forestry segment’s sales will bear the brunt of weak construction activity and efforts to lower production.

Q1 Earnings Up on Improving Farmer Sentiment

Deere reported first-quarter fiscal 2020 (ended Feb 2, 2020) earnings of $1.63 per share, beating the Zacks Consensus Estimate of $1.28. The reported figure increased 5.8% from the prior-year quarter. The quarterly results reflect signs of stabilization in the U.S. farm sector. Farmer sentiment improved on expectations of easing of trade tensions and higher agricultural exports.

Agricultural Sector Looking Up

The U.S. farm sector seems to be showing early signs of stabilization following the passage of The United States Mexico Canada Agreement (USMCA) and the phase 1 trade agreement with China, which instilled farmer confidence. The agricultural sector has been grappling with low commodity prices, sluggish farm incomes and the impact of the trade war.

Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm income is anticipated to improve 3.3% year over year to $96.7 billion in 2020. In inflation-adjusted terms, the projected net farm income in 2020, if realized, would be 5.4% higher than 2000-18 average ($91.7 billion). This will make farmers resume spending on agricultural equipment, which will drive the top line.

Construction Segment to Drag Results

Activity in the overall construction sector has slowed, which in turn is weighing on the Construction & Forestry segment. In the wake of weak demand, Deere is cutting down production and lower inventories. Due to these factors, the segment is anticipated to witness decline in sales in fiscal 2020.

Two-Pronged Impact of the Coronavirus Outbreak

The coronavirus outbreak will have a direct two pronged impact on the company — on sales and the supply chain. The company’s sales into the China market for its agricultural and turf business and traditional Construction and Forestry business is relatively small. The company’s road building business has a larger exposure to China, with sales contributing 10% to 15% of the overall sales. With lack of activity in this area due to the outbreak, this is likely to impact revenues in the ongoing quarter.

Deere has suppliers in China that cater to operations globally. The company anticipates $40 million of expedited freight in the second quarter to make up for the disruption in the supply. Consequently, second-quarter fiscal 2020’s earnings and revenues are likely to bear the impact of the coronavirus outbreak.

Advanced Technologies in Products Sets Them Apart

Deere will benefit from concerted focus on launching products with advanced technologies and features, which provides it a competitive edge. The company remains focused on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process.

As customer’s needs continue to evolve, it will trigger the need to replace old equipment. Their growing reliance on advanced technology to run their complex operations smoothly will continue to fuel Deere’s revenues. Moreover, the company's efforts to expand in precision agriculture will be a game changer.

Share Price Performance

Deere’s shares have fallen 2.3% in the past year, compared with the industry‘s decline of 3.9%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector include Northwest Pipe Company NWPX, Graco Inc. GGG and Sharps Compliance Corp SMED. All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Northwest Pipe has an expected earnings growth rate of 19.5% for the current year. The stock has appreciated 34% over the past year.

Graco has a projected earnings growth rate of 4.3% for 2020. The company’s shares have rallied 19% over the past year.

Sharps Compliance has an estimated earnings growth rate of a whopping 767% for the ongoing year. In a year’s time, the company’s shares have gained 39%.

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