Skip to Content
Stock Analyst Update

Deere's Wide Moat Intact

Despite a tough operating environment, the company's brand and customer value proposition remain strong.

Mentioned:

We are modestly increasing  Deere & Co's (DE) fair value estimate to $97 from $95 to reflect benefits from its cost-reduction efforts. While the outlook for the construction and agricultural equipment markets remains challenged as Deere reiterated expectations for a 10% revenue decline in 2016, the company did increase its net income outlook to $1.35 billion from $1.2 billion largely in response to success in lowering expenses. Despite a tough operating environment, Deere’s brand and customer value proposition remain strong, and we reiterate our wide moat rating.

Quarterly equipment sales declined 14% year over year to $5.9 billion. Among the end markets, agriculture & turf segment sales fared best, only declining 11%. Construction & forestry product demand remains shockingly bad as sales declined 24% principally on lower volumes. While broader U.S. construction spending continues to grow year over year, used equipment from depressed oil & gas activity continues to hinder sales of new equipment. Despite the revenue decline, operating income grew 4% to $625 million, while operating margins expanded 200 basis points to 10.7% on better selling, general, and administrative expense management.

Deere’s financial services net income took a step back in the quarter, declining 18% to $126 million. Weakness in the farming sector has contributed to low equipment prices and losses on sales of equipment that was previously leased; additional credit loss provisions ticked up modestly to 0.24% of average portfolio assets. While loss provisions have ticked up, they are in line with the company’s 10-year average performance and below the 15-year average loss performance.

Year-to-date free cash flow declined 16% from the prior year period to $1.25 billion, largely mirroring the year-to-date trends in net income. Deere’s financial health remains strong, as debt to EBITDA metrics finished the quarter at 1.9 times, allowing Deere to comfortably support its current dividend payout.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

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