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Deere’s Agriculture and Turf Net Sales Will Likely Fall in 2016

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Agriculture and turf segment

The agricultural and turf segment is Deere’s main business segment. This segment’s net sales contribution in 4Q15 was 69% and its operating profit contribution was 48%. The weakness in 2015 continued to negatively impact this segment’s sales.

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4Q15 results and analysis

The agriculture and turf segment continued to face weakness in 4Q15 with net sales falling 25% to $4.6 billion compared to $6.1 billion in 4Q14. The agriculture & turf segment net sales fell due to lower shipment volumes of large agricultural equipment, particularly in the US and Canada. Outside the US and Canada, Brazil was the number one contributor towards the net sales decline. These factors also impacted the company’s operating profits, which we will discuss later in this series.

Farm cash receipt down

Overall, net sales for the agriculture and turf segment fell 25% to $19 billion in 2015 from $26 billion in 2014. Deere earns about a third of its net sales from the US and Canada combined. Therefore, the farm environment in these two countries has a more pronounced impact on Deere’s agriculture and turf segment’s net sales. 2014 was a bumper year for crops, which led to an oversupply. As a result, crop prices took a beating this year, which impacts farm cash receipts.

Currently, Deere & Company (DE) along with Toro Company (TTC), AGCO (AGCO), and Caterpillar (CAT) form about 5% of the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR).

Outlook

In the chart above, you can see how net sales have trended with the farm cash receipts. In 2016, the company anticipates net sales to be down 8% due to weakness in the global farm environment. The management anticipates retail sales for agricultural equipment in the US and Canada to be down 15% to 20% and for turf equipment to be flat to plus 5% in 2016. For the European Union region, the company anticipates a flat to 5% decline in 2016. Similarly, the company anticipated weakness in the Brazil market, which is anticipated to push the South America retail sales for agricultural equipment down 10% to 15%.

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