Raising Deere & Company's Fair Value Estimate

We are increasing

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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