On September 22, we published an updated research report on Deere & Company (OF – Free report). The company will benefit from rising agricultural commodity prices which will likely stimulate demand for agricultural equipment in the near term. An improved scenario in the construction sector along with a focus on investment in precision agriculture will continue to support growth.
Higher commodity prices to drive growth
According to the USDA (United States Department of Agriculture) farm income forecast, net farm income is expected to increase 19.5 percent from 2020 to $ 113 billion for the current year, the level the highest since 2013. This optimistic projection is mainly due to the due to the tightening of global stocks and the strong import demand from China throughout the year. In inflation-adjusted 2021 dollars, net farm income is expected to increase 15.3% in the current year. Rising commodity prices will boost farm incomes, encouraging farmers to increase their spending on new farm equipment and replace aging fleets. This, in turn, will increase Deere’s revenue.
The company expects strong double-digit growth in crop care production rates in fiscal 2022. Although government support is expected to decline this year, total crop cash receipts to the states United is expected to increase 19.7% due to higher commodity prices. mainly soybeans and corn. US customer sentiment has increased in recent quarters with high exports to China. Considering these factors, Deere projects fiscal 2021 net income in the $ 5.7 billion to $ 5.9 billion range, up from previous forecast of $ 5.3 billion to $ 5.7 billion. of dollars.
Optimistic forecasts for farm equipment sales bode well
For the Agriculture and Sod segment, the Company expects sales of large farm equipment in the United States and Canada to increase by approximately 25% in fiscal 2021, and sales of small farm equipment and sod. up 10%. In Europe, the industry is expected to grow by around 10-15%, as rising raw material prices have favored trading conditions in the arable land segment. In South America, sales of tractors and combines are expected to increase by 20%. Industry sales in Asia are expected to increase significantly, mainly driven by a strong recovery in the Indian tractor market.
Net sales of Deere’s Precision Production and Agriculture segment are expected to increase 25% to 30% in fiscal 2021. The segment’s operating margin is estimated to be 20% to 21%.
The company also saw improvement in the Construction & Forestry segment. Sales in the North American construction equipment industry are expected to increase by 15-20%, while sales of compact construction equipment are expected to increase by 20-25%. Forestry equipment sales are expected to be up 15% as demand for lumber remains robust.
Sales of the Construction & Forestry segment are expected to increase by 30% and the operating margin is expected to be 12% to 13% in fiscal 2021. The company is expected to benefit from growth in non-residential investment and a strong order activity from independent rental companies during the fourth fiscal quarter.
Advanced agricultural technology to stimulate growth
Deere is well positioned for long-term growth, supported by continued investments in new products and geographies. Its focus on launching innovative products with advanced technologies and features, and investments in precision agriculture give it a competitive advantage. The company plans to revolutionize agriculture with technology and make agriculture automated, easy to use and more precise throughout the production process. The growing dependence of farmers on advanced technology to run their complex operations will continue to fuel Deere’s income.
Share price return
Deere shares have gained 27.3% so far this year, outperforming the industry’s growth of 21.9%.
Image source: Zacks Investment Research
Rank Zacks and other actions to consider
Deere currently carries a Zacks Rank # 2 (Buy). You can see The full list of today’s Zacks # 1 Rank (Strong Buy) stocks here.
Other top-ranked stocks in the industrials sector include Encore Wire Corporation (CABLE – Free report), Alcoa Company (AA – Free report) and Lincoln Electric Holdings, Inc. (LECO – Free report). While Encore Wire and Alcoa have a Zacks Rank # 1, Lincoln Electric currently has a Zacks Rank # 2.
Encore Wire has a projected earnings growth rate of 332.6% for fiscal 2021. So far this year, the company’s shares have gained 45%.
Alcoa has an estimated earnings growth rate of 573.2% for 2021. The company’s shares have risen 108% so far this year.
Lincoln Electric has an expected earnings growth rate of 45.1% for 2021. The stock has appreciated 22% year-to-date.