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Deere (DE) Rides on Improving End Markets & Farming Innovations

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On Mar 26, we issued an updated research report on Deere & Company (DE - Free Report) . The company is well-poised to gain on rising demand in agricultural and construction sectors, acquisitions and replacement demand triggered by the need to replace old equipment. Focus on advanced technologies in products and expansion in precision agriculture will also aid its results.

Improving Commodity Prices to Fuel Demand

After declining significantly in the earlier part of 2020 amid the pandemic, global commodity prices have regained footing aided by an improving demand environment. Higher commodity prices and improved market access have bolstered sentiment in agricultural markets, which bodes well for players like Deere, AGCO Corporation (AGCO - Free Report) and Lindsay Corporation (LNN - Free Report) .

Further, replacement demand triggered by the need to replace old equipment will continue to fuel the company’s top-line performance.

Improving Construction Markets to Aid Results

Deere like Caterpillar Inc. (CAT - Free Report) is banking on stabilization in the construction markets this year supported by strong demand from housing market. The company expects construction and forestry equipment sales to be around $10.5-$11 billion in fiscal 2021. The mid-point of the guidance suggests year-over-year growth of 20%. Operating margins is projected to be 10.5-11.5% compared to 7% in fiscal 2020, reflecting gains from price and volume.

In North America, construction equipment industry sales are now expected to be up about 5% and sales of compact construction equipment to be up about 10%. End markets for earth-moving and compact equipment have been gaining on strength in the housing market and a modest recovery from trough conditions in the oil and gas sector. In forestry, sales are expected to be up 5% to 10%, driven by recovery in lumber demand, particularly in North America.

Upbeat Fiscal 2021 View

Backed by improving conditions in the farm and construction sectors, Deere now anticipates net income for fiscal 2021 between $4.6 billion and $5 billion, up from the prior projection of $3.6 billion to $4 billion. The mid-point of the guided range indicates year-over-year improvement of 75%.

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, and enhancing capabilities in the after-market and retrofit business. Deere has implemented actions to strengthen its financial position and preserve liquidity. Given the strength of operating results and strong cash generation, Deere will restart its share-repurchase program.

Deere will also benefit from focus on launching products with advanced technologies and features, which provides it a competitive edge. The company remains focused on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process. Their growing reliance on advanced technology to run their complex operations smoothly will continue to fuel Deere’s revenues. The company has embarked upon an operating plan commencing 2021, which highlights its focus on technology, speed and efficiency

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