EUR 850.00 For Business Accounts Only

Morningstar | DE Updated Forecasts and Estimates from 26 Nov 2018

We expect to maintain our $161 fair value estimate for John Deere as we incorporate results from the firm’s fiscal fourth quarter which ended Oct. 28--our expectations largely align with this latest information report. While the firm improved total net equipment sales 18% year over year (including 11 percentage points from the Wirtgen acquisition), the quarter slightly missed consensus estimates on both the top and bottom line. However, we think management expectations for 2019 are quite strong and likely to buoy the shares; our valuation remains well above the market price for this wide-moat firm.

In the agriculture and turf segment, the firm grew fourth-quarter sales 3%, but operating profit declined 5% as production and R&D costs plus disadvantageous currency exchange dominated volume and price gains. Construction and forestry grew sales 65% and increased operating profit 243% due to the Wirtgen road building equipment acquisition, strong volume and price, and decreased production costs, as well as lapping an impairment charge in the prior-year period. Full fiscal 2018 ag and turf operating margin slipped 40 basis points from the prior-year period, to 12.1%, and excluding the Wirtgen impact, we calculate fiscal 2018 construction and forestry operating margin improved from 6.1% to 10.5% (or to 8.5% including Wirtgen); total equipment operating margins improved 80 basis points to 11.8%. Management raised its midcycle (2022) operating margin target from 12% to 15%, but noting that in the past 15 years the firm only approached this level in the 2011-14 period, we currently model margins well below new guidance.

Looking forward in agriculture, we note healthy orders on the early order program and used inventories are down one third from their 2014 peak, both supporting replacement demand. We believe strong uptake on technology will support higher margins, and farmers’ implementing increasingly sophisticated precision agriculture will enhance replacement demand.

Management expects 15% growth in fiscal 2019 for construction and forestry (of which 500 basis points come from Wirtgen), plus 3% growth in agriculture and turf will improve total company net sales by 7% overall, of which Wirtgen contributes 200 basis points and price 300 basis points, with foreign exchange likely to act as a 200 basis point constraint. Management’s expectation for fiscal 2019 net operating cash flow is a particularly impressive $4.8 billion, which about doubles the 2017 level and is back in the range of glory days 2013 and 2014, albeit with Wirtgen now in the portfolio.