Deere Sees a Housing Bottom in 2008

Construction equipment-maker Deere & Company (DE) should be one of the first to be impacted by the U.S. housing slump. Yet the company has maintained growth even this year, with overseas markets and non-residential construction offsetting lower housing starts. On its F4Q07 (Qtr End 10/31/07) conference call, Deere says authoritatively that it sees a bottom to the housing slump in 2008.

Andrew Obin - Merrill Lynch

I was just a bit surprised by your outlook for construction equipment for next year, given just how weak residential is and what retail sales data shows, for example, for you, from Caterpillar. What makes you confident that construction and forestry will effectively bottom out in ’08?

Marie Z. Ziegler, VP Investor Relations, Deere & Co.

Well, I think what you are seeing is that in ’08, we are able to produce to retail demand. Don’t forget that in the comparison, you have in it a time when we took out about $250 million out of inventories, both dealer and company-owned, so you’ve got that ability to produce to retail and that is a significant factor.

You also have the overseas forestry markets, which we see down a little bit but still holding up very good. You are also, for the independent rental companies, we’ve had a very significant decline in 2007. Our markets were down about 70% in that segment. We expect that to be flattish next year, so we’ve got a number of factors at play there.

But the single biggest factor has been the fact that we have managed those inventories and so we are able to produce to retail. Now obviously if the market conditions change, we may have to reassess that but our outlook is based on housing starts, which we indicated of 1.1 million.

Andrew Obin - Merrill Lynch

So given your destocking, the communication from your customers and your dealers supports this forecast -- that’s the right read, right?

Marie Z. Ziegler

That’s absolutely right. We actually talked to our dealers and very recently we had annual meetings and dealer advisory meetings and we surveyed them and they feel that their inventories are in alignment with the current market outlook.

Later on in the call:

Marie Z. Ziegler

...Certainly with housing, one would expect certain segments to be under some pressure. On the other hand, we expect non-residential spending to remain at a very high level, remain flat with 2007."

DE 1-yr. chart: