Vertical Research Partners, an independent equity research and consulting firm, releases this analysis after participating in a John Deere-hosted event with CEO Samuel Allen and CFO Rajesh Kalathur.
No headwinds in 2018
For the first time during CEO Sam Allen’s leadership, there are no growth headwinds anticipated in the year ahead. All major geographies and all major product lines are expected to be either flat or up in 2018. That follows the third time in Deere’s history with 3 years of sequential declines.
During the most recent stretch, revenues declined 33% from 2013 to 2016, similar to the last such multi-year decline that was down 35% and ended in the early 1980s. In both downturns, large ag was down over 60%. The difference is the success with which Deere managed this downturn, posting the fifth best net income on record in 2017 on a still depressed revenue base, particularly in higher margin high horsepower North America ag equipment.
Looking for a Gradual Climb Out of North American 'Trough'
The base case scenario seems to be positioned for stable crop prices over the next several years, viewing current prices as broadly supportive of farmer profitability, but not something that will drive any surge in demand. Instead, as equipment continues to age, management anticipates a gradual recovery to normal replacement level demand, with high horsepower ag still estimated at 70% of normal in 2018.
The early stages of demand recovery are largely a result of successful downturn management over the past several years. Deere underproduced large ag demand in North from 2014 through mid-2017. In the process, used equipment inventories dropped about 35%. That’s now positioned dealers to be more supportive of the trade cycle, with stable to improving used prices adding confidence in trade values.