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Deere’s Agricultural Segment Revenue Rises, Margin Contracts

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Agriculture & Turf segment

Deere & Company’s (DE) Agriculture & Turf segment is its largest revenue generator. It reported revenue of $7.1 billion in the fiscal second quarter, a 21.8% rise compared to the same quarter of the previous year, during which it reported revenue of $5.8 billion.

In the past three years, the segment’s second-quarter revenue has remained flat, but its revenue growth in this quarter has been a welcome development for Deere.

The segment’s revenue growth was primarily driven by higher shipment volumes. Despite the dollar’s stabilizing, Deere benefited from favorable foreign currency exchange, which could be the result of its hedging strategy.

In the second quarter, the Agriculture & Turf segment reported an operating profit of $1.05 billion compared to $1.0 billion in the same quarter of the previous year. This rise reflects an increase of ~5% on a YoY (year-over-year) basis. 

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The growth in DE’s operating profit was driven by higher shipment volumes. On the other hand, an increase in research and development and production costs had an adverse effect on its operating profit. As a result, the segment’s operating profit margin stood at 15.0% compared to 17.4% in the previous year. Note, though, that the previous year also included gains from Deere’s SiteOne sale.

Outlook

For fiscal 2018, the segment’s revenue is projected to rise 14%. This growth is expected to be seen across the regions in which the company operates, with the exception of Asia, which is expected to remain flat. The United States and Canada are expected to see revenue growth of 10%, while the 28 members of the European Union are expected to see growth of 5%. South America could see growth in the range of 0%–5%. Also, stability in the US dollar could limit the gains from favorable foreign currency.

Investors can gain indirect exposure to Deere by opting for the VanEck Vectors Natural Resources ETF (HAP), which has invested 6.3% of its portfolio in Deere. The fund also provides exposure to ExxonMobil (XOM), the Mosaic Company (MOS), and CF Industries Holdings (CF) at weights of 3.9%, 1.3%, and 1.2%, respectively, as of May 18.

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