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Stock Analyst Update

Raising Deere & Company's Fair Value Estimate

A more favorable earnings outlook for 2017 has led us to increase our fair value estimate of the wide-moat farm equipment maker to $104.


We are increasing  Deere & Co’s (DE) fair value estimate to $104 from $97 to reflect the time value of money since our last update and a more favorable earnings outlook for 2017 than we initially projected. For 2017, the company expects its agriculture & turf segment sales to contract 1%, while its construction & forestry sales are forecast to grow 1%. In response, 2017 net income should decline 8% to $1.4 billion reflecting continued headwinds from poor product mix and higher loss provisions in the financial services unit. While the outlook remains somewhat pessimistic, the company’s projected sales and profit declines for 2017 are among the least severe declines witnessed in the last three years and indicate that trends are finally bottoming

Fourth quarter equipment sales declined 5% to $5.8 billion, with similar sales declines in the agriculture & turf and the construction & forestry segments. Equipment operating margin was flat year over year at 6.4%. Agriculture & turf operating margin improved an impressive 350 basis points to 8.4% reflecting stronger price realization and cost reduction efforts. In contrast, construction & forestry margins declined 350 basis points to negative 1.5% on sales incentive activity.

Financial services net income remains under pressure. Quarterly net income declined 28% year over year to $110 million, reflecting tighter loan financing spreads, higher losses on lease residual values and higher credit loss provisions. Recent stabilization in used equipment prices should likely limit further lease losses, while credit loss provisions as a percentage of assets although recently elevated remain below the 15-year average.

Full-year free cash declined 4% to $2.3 billion. While full-year net income declined 22%, the company saw notable declines in its working capital balance which aided cash flow. The company deployed $761 million of cash toward dividends, $205 million to share repurchases and utilized the remainder on debt reduction.

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