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Deere’s Construction & Forestry Revenue Rises but Margins Dip

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Deere’s Construction & Forestry segment

In fiscal 1Q18, Deere & Company’s (DE) Construction & Forestry segment reported revenue of $1.7 billion, a 57.4% rise compared to its fiscal 1Q17 revenue of $1.1 billion. The segment’s first-quarter revenue rose after a gap of three years, indicating a positive turnaround.

The segment’s revenue growth was mainly the result of the company’s acquisition of Wirtgen Group. DE completed the acquisition in December 2017. Wirtgen contributed ~23% to the segment’s growth. Other significant growth contributions came from higher shipping volumes and a favorable currency hedge.

The Construction & Forestry segment reported an operating profit of $32.0 million in fiscal 1Q18, a fall of 13.5% from its fiscal 1Q17 operating profit of $37 million. Its revenue increase and the decline in its operating profit resulted in a lower operating profit margin. The segment reported an operating margin of 1.9% in fiscal 1Q18 compared to 3.4% in fiscal 1Q17, representing a fall of 155 basis points on a year-over-year basis.

The falls in Deere’s operating profit and margin were primarily due to Wirtgen’s operating loss of $92 million resulting from purchase accounting and acquisition costs. Also, the increase in production costs had an adverse impact on the segment’s margin.

Outlook

Wirtgen will likely continue to drive the Construction & Forestry segment’s revenue growth. A positive outlook for economic growth worldwide is also expected to drive growth. Margins could continue to be under pressure due to an increase in production and acquisition costs.

Investors looking to hold Deere indirectly may want to opt for the First Trust Indxx Global Agriculture ETF (FTAG), which has invested 5.0% of its portfolio in Deere. The fund’s other holdings include DowDuPont (DWDP), Monsanto (MON), and CNH Industrial (CNHI), which have weights of 9.9%, 10.0%, and 3.7%, respectively, as of February 20, 2018.

In the next article, we’ll look into analysts’ views and recommendations on DE following its fiscal 1Q18 earnings.

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