Deere (DE) Rides on Demand Farm Equipment and Product Launches


Deere & Company DE is benefiting from higher agricultural commodity prices which will likely boost demand for agricultural equipment in the near term. An improved scenario in the construction and forestry sector as well as the focus on investment in precision agriculture will continue to support growth.

The company recently released its fiscal 2021 fourth quarter results. Adjusted earnings per share (EPS) for the quarter was $4.12, which beat Zacks’ consensus estimate of $3.82. Net income jumped 72% from year-ago quarter levels. Net sales from the equipment business (which includes agriculture and turf, construction and forestry) were $10.276 billion, reflecting a 19% year-over-year increase. However, revenue fell short of Zacks’ consensus estimate of $10.344 billion.

Rising commodity prices to foster growth

According to the USDA (United States Department of Agriculture) farm income forecast, net farm income is expected to increase 23.2% from 2020 to $116.8 billion for the year in prices, the highest level since 2013. This optimistic projection can be attributed to higher commodity prices stemming from tight global inventories and strong import demand from China throughout the year. . In inflation-adjusted 2021 dollars, net farm income is expected to increase 18.7% in the current year. Rising commodity prices will boost farm incomes, encouraging farmers to increase spending on new farm equipment and replace aging fleets. This, in turn, will boost Deere’s top line.

Although government support is expected to decline this year, total U.S. crop cash receipts will likely rise 17.9% year-over-year due to higher commodity prices. US customer confidence has improved in recent quarters with strong exports to China. Given these factors, Deere forecasts net income for fiscal year 2022 in the range of $6.5 billion to $7 billion, suggesting an increase from $5.96 billion for fiscal year 2021.

Bullish outlook for farm equipment sales bodes well

Positive agricultural fundamentals, including favorable crop prices, economic growth, and increased infrastructure spending in fiscal 2022, will continue to drive demand for agricultural and construction equipment. For the Agriculture and Turf segment, Deere expects sales of large agricultural equipment in the United States and Canada to increase approximately 15% in fiscal 2022. Small agricultural and turf equipment is expected to increase 15 to 20%. In Europe, industry sales are expected to increase by 5% as higher commodity prices support trading conditions in the arable segment and dairy prices remain resilient. In South America, industrial sales of tractors and combines are expected to increase by 5%.

Deere’s Production and Precision Ag segment net sales are expected to increase 20% to 25% in fiscal 2022. The segment’s operating margin is estimated to be between 20% and 21%. The company also sees improvement in the Construction & Forestry segment. North American compact earthmoving and construction equipment industry sales are expected to increase 5-10%. Earthmoving and compact equipment end markets are expected to remain strong in fiscal 2022, driven by continued strength in the housing market, increased activity in the oil and gas sector as well as significant capital investment programs independent rental companies. Sales of forestry equipment are expected to increase by 10% to 15% as demand for lumber remains robust. Sales in the Construction & Forestry segment are expected to increase by 10 to 15% and the operating margin is expected to be between 13.5% and 14.5% in fiscal 2022.

Advanced agricultural technology to stimulate growth

Deere is well positioned for long-term growth, supported by steady investment in new products and geographies. The focus on launching innovative products with advanced technologies and features as well as investing in precision agriculture provides a competitive advantage. The company recently launched the ExactRate and AutoPath planter-applied fertilizer systems. Deere envisions revolutionizing agriculture through technology and making farming automated, easy to use, and more precise throughout the production process. Farmers’ growing reliance on advanced technology to carry out their complex operations will continue to fuel Deere’s revenue.

Price performance

Deere shares have gained 44% in the past year, against 39% growth in the industry.

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Zacks Ranking and Stocks to Consider

Deere currently carries a Zacks Rank #3 (Hold).

Some higher ranked stocks in the industrials sector include SiteOne landscape supply SITE, A. O. Smith Corporation OSA and ScanSource, Inc. SCSC. While SiteOne Landscape and AO Smith carry a Zacks Rank #1, (Strong Buy), ScanSource carries a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank stocks here.

SiteOne Landscape has an estimated profit growth rate of around 77.2% for the current year. Over the past 30 days, the Zacks consensus estimate for current-year earnings has been revised up 14%.

Within a year, the company’s shares rose 68%. SiteOne Landscape has a last four quarter earnings surprise of 130.9% on average.

AO Smith forecasts a profit growth rate of around 35% for the current year. The Zacks consensus estimate for current-year earnings has been revised up 1% in the past 30 days.

Shares of AO Smith have jumped 44% in one year. The company has a surprise on earnings for the last four quarters of 16.8% on average.

ScanSource forecasts an earnings growth rate of around 19% for 2021. Zacks’ consensus estimate for current-year earnings has been revised up 1% in the past 30 days.

Shares of the company have appreciated 23% over the past year. ScanSource has a four-quarter earnings surprise of 34.6% on average.

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