Deere taking action early in potential down cycle: Gimme Credit

Deere & Co . (NYSE:DE) is taking proactive steps to mitigate the effects of a potential economic downturn, according to a note from corporate bond research firm Gimme Credit.

The firm notes that the agricultural and construction equipment manufacturer has faced weakening demand across its markets, including its Construction & Forestry (CF) segment, which had been a bright spot earlier this fiscal year.

However, they add that as of its third-quarter report, CF has also begun to show signs of slowing demand, joining Deere’s agriculture and turf segments, which have seen progressively weaker outlooks throughout the year.

Gimme Credit explains that to address this, Deere has initiated underproduction in both its agriculture and construction segments, particularly earthmoving equipment.

According to the firm, “taking action in advance to address weakening demand could temper the effects of the next cycle.”

However, it is seen as concerning that Deere’s efforts to diversify away from the agricultural cycle are being challenged by a simultaneous construction slowdown.

Demand for Deere’s products is said to have been tempered by several factors, including lower commodity prices driven by elevated grain stocks and favorable weather, as well as an increase in used inventory, particularly in the U.S. and Canada.

Gimme Credit says this has hurt demand for both agricultural and construction equipment. Moreover, global demand is being further hampered by high interest rates and geopolitical uncertainties.

Deere has implemented a cost reduction plan, including a mid-single-digit reduction in its global salaried workforce.

These measures are expected to generate $230 million in annual savings, with $100 million anticipated in the current fiscal year. Despite these headwinds, Deere reaffirmed its full-year net income guidance of $7 billion, reflecting confidence in its cost-saving initiatives.

Gimme Credit reaffirmed its “stable” credit score and “outperform” rating on Deere’s (2030 notes, citing the company’s strong free cash flow and early actions to support profitability amid a potentially challenging economic environment.