As Deere & Co (NYSE:DE) prepares to release its third-quarter earnings report before the market opens on Thursday, analyst Jerry Revich and team at Goldman Sachs are focusing on the potential risks facing the company's captive finance business in a challenging environment for farmer incomes.

According to a recent analyst note, the team finds that Deere's finance operations are largely resilient, with a significant portion of its loan portfolio showing minimal risk.

Deere on Thursday is expected to report EPS of $5.77 on revenue of $10.944 billion.

What Investors Need To Know: Goldman Sachs highlights that Deere's captive finance business has demonstrated resilience, with 75% of its loan portfolio exhibiting minimal risk. Wholesale receivables, which make up 25% of the portfolio, have historically experienced negligible losses due to the profitability of dealers and the asset-backed nature of the loans.

The team at Goldman Sachs projects that peak write-offs could potentially impact EPS by up to 85 cents for fiscal year 2024.

Applying the worst-case scenarios from historical credit losses to Deere's current portfolio, Goldman Sachs indicates a possible $235 million reduction in net income, compared to the company's guidance of $770 million for its financial services segment.

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Despite these concerns, Goldman Sachs sees Deere's financial outlook remaining positive. The company is expected to generate revenues of approximately $45.1 billion for the fiscal year ending October 2024, with gradual growth anticipated in subsequent years.

The stock is currently trading at 14 times the mid-cycle EPS estimate of $24.50, presenting a favorable risk-reward ratio, particularly as the market stabilizes from its current trough.

What Else: Goldman Sachs believes Deere's strong positioning is supported by its investment in Precision Agriculture technologies and a reduction in used equipment inventories by 5% over the past three months. However, the company faces potential risks from adverse weather conditions affecting crop yields, inventory build-ups in China, and ongoing supply chain constraints.

Goldman Sachs maintains a Buy rating on Deere, with a 12-month price target of $466, based on a valuation of 19 times the mid-cycle EPS estimate. The outlook reflects confidence in Deere's ability to navigate through cyclical challenges and leverage its strong market position for continued earnings growth.

Price Action: DE, which was trading at $352.02 on Wednesday, has a 52-week high of $435.74 and a 52-week low of $340.20.

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