Credit Suisse Expects Deere To Outperform, But Lowers Its Estimates

• Shares of Deere & Company DE are down 10 percent year-to-date, but traded above the $90 mark for most of the year.
• Credit Suisse’s J. Cook maintained an Outperform rating on the company, with a price target of $87.
• Deere has guided to a 7 percent sales decline in FY16 but is expected to record robust cash flows, Cook noted.

Better AG margins enabled Deere to report its 4Q15 results ahead of the estimates. The company also guided to FY16 EPS of ~$4.30, which was ~$0.20 above the Street expectations, while mentioning that Large AG is likely to continue to be a headwind, down another 25-30 percent in FY16.

Deere guided to FY16 net income of $1.4 billion on a 7 percent sales decline, indicating earnings of $4.30 using the 4Q share count.

Deere expects to continue to under produce retail demand in HHP, but to a lesser degree than in FY15. The company reduced its used inventory by 18 percent from peak levels and its C&F Sales and margin disappointed in 4Q due to the continued impact of oil and gas as well as lower rental utilization, Cook stated.

Low plant utilization and declines in HHP AG are expected to result in decrementals of about 40 percent. Cook added that the company’s CFO is expected to be strong at $2.6 billion, with excess cash likely to be used for niche M&A and share repurchases.

“We think the key will be increased evidence DE can start to produce in line with retail in 2H'16 implying FY'17 EPS potentially up,” Cook wrote. The EPS estimate for FY16 has been reduced from $4.45 to $4.35.