Morningstar last week initiated credit coverage of Deere with an issuer rating of A. The rating reflects Deere's position as a highly recognized manufacturer of farm equipment, offset by its inherent cyclicality.
Best known for its John Deere equipment, Deere holds a nearly 50-percent share of the North American farm equipment market thanks to its machinery's high resale value and solid support network. Elsewhere, Deere faces more-substantial competition from CNH Global and AGCO, but remains the largest global player. Typically, Deere enjoys wider profitability during market upswings and more-muted income declines during downturns than its rivals, stemming from its geographically diversified operations and manufacturing efficiency.
Deere was not immune to the cyclical downturn in fiscal 2009, as its sales fell more than 19 percent and earnings before interest, taxes, depreciation, and amortization slid 27 percent. “We forecast mild top-line recovery of about 3 percent in fiscal 2010 (ending October) but a further decline in EBITDA to a trough of $2.2 billion,” Morningstar said. “Based on that, we expect total debt/EBITDA to peak at 1.6 and return closer to 1 after that.”
