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Strong Equipment Demand & Farming Innovations Aid Deere (DE)

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On Dec 11, we issued an updated research report on Deere & Company (DE - Free Report) . The company will benefit from the higher U.S farm income projections and pick-up in agricultural commodity prices that will likely spur agricultural equipment demand in the near term. Stabilization in the construction and forestry markets also bode well for the company. Focus on precision agriculture and launching products with advanced technologies will also continue to aid growth.

Rising Farm Income Bodes Well

The U.S farm sector is showing signs of stabilization on the pick-up in commodity prices and higher U.S farm income forecasts. Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm income is anticipated to jump 43.1% to $119.6 billion in 2020. In inflation-adjusted terms, the projected net farm income in 2020, if realized, would mark the highest level since 2013 and 32% higher than the 2000-19 average ($90.6 billion). These factors will encourage farmers to resume spending on agricultural equipment, which will drive the company’s performance.

Upbeat Fiscal 2021 View

Net income for fiscal 2021 is projected between $3.6 billion and $4 billion compared with its prior projection of $2.7 billion to $3.1 billion. The company expects to benefit from the stabilization in the construction and forestry markets in fiscal 2021. Its construction and forestry equipment sales for the fiscal year will likely be up 5-10%, year on year. The outlook reflects recovery from the pandemic-induced demand disruption for construction equipment, solid demand in compact construction on pick-up in residential building activity, as well as anticipated growth in the roadbuilding sector. The global forestry industry sales are forecast to be flat to up 5% for the fiscal year on recovery in lumber demand, particularly in North America.

Deere anticipates Agriculture and Turf equipment sales to increase 10-15% in fiscal 2021. Industry sales of agricultural equipment in the United States and Canada are expected to be up 5-10% on higher grain prices and lower inventory levels, while turf and utility equipment sales will likely be flat to up 5% for fiscal 2021. Industry sales in Europe are forecast to be flat to up 5% for fiscal 2021. Apart from this, record soybean production, higher commodity prices, and favorable exchange rates have been supporting positive economics in South America. Therefore, industry sales of tractors and combines in the country are projected to be up about 5%, especially in Brazil.

Investments in Farming Technology to Drive Growth

Deere is assessing the cost structure by reviewing organization efficiency and footprint assessment, which in turn will help boost margins. The company is focused on driving capital-allocation decisions, intensifying investments in precision agriculture, as well as enhancing capabilities in the after-market and retrofit business.

Deere will benefit from focus on launching products with advanced technologies and features, which provides it a competitive edge. Moreover, customers’ growing reliance on advanced technology to run complex operations smoothly will continue to fuel the company’s revenues. Management anticipates replacement demand for aged fleet to support firm equipment volumes in the near term. Further, Deere’s efforts to expand in precision agriculture will be a game changer.

Price Performance

The company’s shares have appreciated 64.5% over the past six months, outperforming the industry’s growth of 63.1%.

Zacks Rank & Other Stocks to Consider

Deere currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Other top-ranked stocks in the Industrial Products sector include iRobot Corporation (IRBT - Free Report) , AGCO Corporation (AGCO - Free Report) and Silgan Holdings Inc. (SLGN - Free Report) . While iRobot and AGCO flaunt a Zacks Rank #1, Silgan carries a Zacks Rank of 2 (Buy), at present.

iRobot has an estimated earnings growth rate of 18.8% for the ongoing year. Shares of the company have gained 1.7% in the six months.

AGCO has an expected earnings growth rate of 15.5% for 2020. The stock has appreciated 61.1% in six months’ time.

Silgan has a projected earnings growth rate of 37.9% for the current year. Over the past six months, the company’s shares have rallied 12%.

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