Weak Farm Equipment Outlook No Shock
Our wide moat rating for Deere is unchanged after the Farm Progress Show.
We recently attended the Farm Progress Show in Decatur, Illinois, the largest farm equipment show in North America. After meeting with AGCO (AGCO), Deere (DE), and CNH Industrial (CNHI), we think overall sentiment is on par with recent company reports of oversupply in the farm equipment market. In North America, new and used equipment inventories remain high, and an anticipated sales decline of 25%-30% in 2015 is likely to weigh on 2016 sales unless there is a weather abnormality that improves farm economics. South American industry conditions remain under severe pressure because of fiscal austerity policies in Brazil. Europe appears to be the sole bright spot, although most operators are highlighting the fact that from a cyclical perspective, low sales volume over the past five years should spur an equipment cycle refresh during the next two years. Europe's trends are in stark contrast to North and South America, where sales were relatively strong through 2013. With most of its business tied to the North American agricultural outlook, Deere's revenue trends will be under the most pressure in coming months, although we expect share repurchases to limit declines in earnings per share. We are maintaining our $89 fair value estimate and wide moat rating for Deere.
The major manufacturers highlighted three major trends this year. First, everyone appears to be making substantial telematics investments, albeit no one could quantify the expected economic benefit. Second, with the global market remaining fairly depressed, there was less emphasis on expensive high-horsepower equipment and more emphasis on value-oriented and flexible-use products at the 2015 show. Third, reducing dealer and manufacturer inventory levels remains a key priority. During our meetings, all manufacturers reminded investors that their current production levels are below retail sales volume as they attempt to liquidate excess inventory and improve free cash flow.
Kwame Webb does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.