A report from Bloomberg last week that on plans by Deere & Co. to allocate combines in 2012 created somewhat of a stir in the ag equipment business last week. But according to at least one analyst, Deere had earlier talked about the allocation program on various occasions and it shouldn’t be considered as “big news.”
“We believe Deere’s combine inventory management efforts at its dealers have been well communicated for several months now,” Ann Duignan, machinery analyst for JP Morgan wrote in an October 13 note to investors.
She said the company has discussed some of the programs it can put in-place given inventory issues over the past several months on its conference calls and at various events. “Our own visits to events such as the Farm Progress Show, where we got to speak with dealers, verified that Deere has been putting dealers “on allocation” due to ongoing build in used-combine inventories. The Bloomberg story featured several examples of these allocation programs, but we note that this was not new information.”
She went on to say that JP Morgan views the inventory management as the appropriate response by John Deere as it helps to both regulate industry wide inventory and smooth out revenues over time.
“We estimate that combines represent only a $3.6 billion business, or about 12% of the annual $30.2 billion ag machinery industry, as reported by the U.S. Census Bureau, this includes exports,” she said.
“We believe combines represent as little as 13-15% of Deere’s North American revenues, contrary to the one-third mentioned in the Bloomberg article, and 6% of overall company revenues, as well as 14% of North American EBIT and about 6.5% of full-company EBIT. We therefore view a flat combine revenue growth rate in 2012 as a relatively minor issue.”
“We currently believe that any year-over-year decline in North American combine sales for Deere will be offset with price and mix, as Deere continues to introduce larger products with more features (GPS, even refrigerators), and continues to take opportunistic pricing. Our overall growth estimate for North America in FY2012 is +5%; non-combine businesses would therefore have to grow about 5.9% next year to meet this number,” says Duignan.
She adds that this is not an unreasonable expectation, given expected growth in major crop receipts of 20% in the 2011-12 crop year, according to the JP Morgan model and the USDA’s most recent estimates.