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Stock Strategist

Deere Plows Ahead

Ag market weakness persists, but a solid brand and strategy should keep returns high.

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We modestly reduced our 2016 earnings forecast for  Deere (DE) to reflect the company's latest reduction in 2016 net income guidance to $1.2 billion from $1.3 billion, the result of higher loss provisions in its leasing business. However, we reiterate our $89 fair value estimate as our long-term view of the company's earnings power is unchanged. While the near-term lull in the farming sector remains challenging, Deere's strong brand, solid position in precision agriculture, and steady balance sheet spur us to reaffirm our wide economic moat rating. With the shares trending into 4-star territory after second-quarter results were released, we now view Deere as one of our most attractive long-term investment opportunities in the heavy equipment space.

Deere's second-quarter industrial sales were down a modest 4% compared with the prior year as agricultural and turf sales were flat, while construction and forestry sales declined 16%. Serious headwinds remain in both the agricultural and construction end markets, but quarterly sales were somewhat aided by order timing issues and a move to increase production runs to improve cost absorption in the period. All told, the industrial operating margin contracted 180 basis points to 9.7% in the quarter, with heavy sales incentives in construction and forestry hampering margins.

Kwame Webb does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.