Deere's Wide Moat Intact

We are modestly increasing

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.

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