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Deere (DE) Reinforces Construction Business with Wirtgen Buy

Zacks

Deere & Company DE, the world’s largest farm equipment manufacturer, has concluded the previously announced acquisition of world’s leading road-construction equipment maker, Wirtgen, for 4.6 billion euros ($5.2 billion) in cash and debt. The buyout of Germany-based Wirtgen will aid Deere’s North America-centric construction business expand to a global scale and also catapult it to the position of an industry leader in global road construction. This is touted to be its largest deal ever and expected to immediately boost earnings.



Deere had announced its intent to acquire Wirtgen in June this year. Since then the stock has gained 20.3%, outperforming the industry’s growth of 19.0%.

Enhances Product Portfolio

Wirtgen’s machines are used across the road construction sector from milling to processing, mixing, paving, compaction and rehabilitation. The company sells its machines under five premium brands across more than 100 countries through a large network of company-owned and independent dealers. It employs around 8,200 people. Deere plans to retain Wirtgen’s brands, management, manufacturing footprint, employees, and distribution network.

Deere makes equipment for part of the road-building process — loaders and dump trucks to load rocks into crushers from quarries, earthmoving tools at construction sites, as well as dozers and motor graders that help grade roads. Wirtgen’s products are complementary to Deere's portfolio and the combined business will benefit from sharing best practices in distribution, customer support, manufacturing and technology as well as in scale and efficiency of operations.

The acquisition aligns with Deere's long-term strategy to expand in both agriculture and construction — the company's two global growth businesses.

Why Road Construction?

Expansion in road construction is a better choice given that spending on road construction and transportation projects has grown at a faster rate than the overall construction industry. Additionally, it also tends to be less cyclical. Further, there is long-term improvement potential as infrastructure development remains a priority globally with repair and replacement of roads and highways always commanding utmost importance.

Deere Poised Well for the Future

Despite weak global agricultural sector, the company benefited from the adept execution of its operating plans and disciplined cost management as well as the impact of a broad product portfolio. The company reported earnings per share of $6.68 in fiscal 2017, 38.9% higher than the year-ago figure.

Its agriculture and turf business contributed about 68% to total revenues in the fiscal 2017, while construction and forestry accounted for 19% of revenues. Deere projects Agriculture and Turf equipment sales to increase about 9% in fiscal 2018, including a positive currency-translation effect of about 2%. The company foresees global sales for Construction & Forestry equipment to be up about 69% for fiscal 2018, including a positive currency-translation effect of about 1%. The Wirtgen acquisition is likely to add about 54% to the sales for the segment.

The outlook is based on moderate global economic growth, including higher housing starts in the United States, and an improved oil and gas sector. In forestry, global industry sales are projected to be flat to up 5% on the back of improved lumber prices in North America.

The company will continue to gain from its disciplined cost management and continued investment in innovative technology and solutions. Higher housing starts in the United States and an improving oil and gas sector bode well for the company. Recovery in the dairy and livestock sectors will drive growth in the Europe. In the long term, the company is likely to gain from favorable trends, supported by increasing population and rising living standards.

Deere currently sports a Zacks Rank #1 (Strong Buy).

Other top-ranked stocks worth considering in the same sector are Caterpillar, Inc. CAT, Terex Corporation TEX and The Manitowoc Company, Inc. MTW. All three stocks flaunt a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar generated an average positive earnings surprise of 53.06% in the past four quarters. The company’s shares have surged 52.6%, year to date.

Terex has an average positive earnings surprise of 135.92% in the trailing four quarters. Its share price has gained 45.3% year to date.

Manitowoc has an average positive earnings surprise of 139.10% in the last four quarters. The company’s share price has surged 63%, year to date.

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