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Deere’s Agriculture and Turf Segment’s Margin Declined

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Agriculture and Turf Equipment segment

Deere’s (DE) Agriculture and Turf Equipment segment generates most of the company’s revenues. The segment reported revenues of $5.6 billion in the fourth quarter—3.1% growth compared to the fourth quarter of 2017 when it reported revenues of $5.44 billion. In the fourth quarter, the segment reported the highest fourth-quarter revenues since the fourth quarter of 2015.

The segment’s revenue growth was mainly driven by higher shipment volumes and a higher price realization. However, the strong dollar had a negative impact on the segment’s revenues.

In the fourth quarter, the segment reported an operating profit of $567 million—compared to $594 million in the fourth quarter of 2017, which signifies a decline in the profit by 4.5% YoY (year-over-year).

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The decline in Deere’s operating profit was driven by the increase in the cost of production due to higher raw material prices. More research and development and unfavorable foreign currency also dented the segment’s operating profit. However, higher shipment volumes, lower warranty expenses, and higher price realizations partially covered the increased costs. As a result, the segment’s operating profit margin contracted to 10.1% compared to 10.9% in the third quarter of 2017—a decline of 80 basis points YoY.

Outlook

For fiscal 2019, the Agriculture and Turf Equipment segment’s revenues are projected to increase 3%. On a geographical basis, the US and Canada are expected to see flat to 5% revenue growth. The 28 members of the European Union are expected to be flat. South America is will likely be flat to 5% due to improved demand in Brazil. Asia is expected to remain flat. The unfavorable foreign currency could have a negative impact on the segment.

Investors could gain indirect exposure to Deere by opting for the VanEck Vectors Natural Resources ETF (HAP), which has invested 8.7% of its portfolio in Deere. The fund also provides exposure to ExxonMobil (XOM), Mosaic (MOS), and CF Industries Holdings (CF) with weights of 3.2%, 2.4%, and 2.0%, respectively, as of November 21.

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