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How Does Deere’s Construction Segment Compare to Its Peers’?

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Construction and forestry revenue and margin trends

Deere & Company’s (DE) construction (XHB) and forestry segment generated revenues of $5.9 billion, $6.6 billion, and $6 billion, respectively, in 2013, 2014, and 2015. These figures translate to 15.7%, 18.5%, and 21% of DE’s total revenues in the respective years.

Average operating margins in the segment across business cycles have been lower than agricultural equipment margins. In 2013, DE’s construction segment margin was 6.4%, 9.6% lower than its farm equipment margin.

Operations improved in the next two years, with the segment posting margins of 9.8% and 8.9%, respectively, in 2014 and 2015. Like its farm equipment, Deere markets its construction and forestry equipment through independent dealers spread across key regions.

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Competitor margin analysis: Caterpillar

Deere’s dominant competitor in the construction (ITB) equipment industry is Caterpillar (CAT). CAT is the world’s largest heavy equipment maker. With $17.8 billion in annual revenue in 2015, CAT made around three times Deere’s revenue in the construction segment.

In line with the economies of scale that come with its size, CAT’s segment margin of 10.4% in 2015 was 150 basis points higher compared than Deere’s. CAT’s margins in 2013 and 2014 were 7.4% and 11.4%, respectively.

Competitor margin analysis: Volvo

Some of Deere’s other competitors in the industry include Japan-based Komatsu and Sweden-based Volvo (VOLVY). With $6 billion in construction equipment revenue, Volvo had a construction segment operating margin of 4% in 2015.

Volvo’s operating margins have been highly volatile, ranging between 1.8% and 10.8% in the five-year period between 2011 and 2015. Although Volvo is a major European player, the company’s tilt toward the North American region has increased in the last five years. Volvo derived 23.3% of its construction equipment revenue from North America in 2015 compared to 12.7% in 2011.

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