Deere & Company (OF – Free Report) is benefiting from the rise in agricultural commodity prices which will likely stimulate demand for agricultural equipment in the short term. An improved scenario in the construction and forestry sector as well as a focus on investment in precision agriculture will continue to promote growth.
The company recently released its results for the fourth quarter of fiscal 2021. Adjusted earnings per share (EPS) for the quarter was $ 4.12, which exceeds Zacks’ consensus estimate of $ 3.82 . Net income jumped 72% from levels in the previous year quarter. Net sales from the equipment business (which includes agriculture and sod, construction and forestry) amounted to $ 10.276 billion, reflecting a 19% year-over-year increase. However, revenue fell short of Zacks’ consensus estimate of $ 10.344 billion.
Higher commodity prices to promote growth
According to the USDA (U.S. Department of Agriculture) farm income forecast, net farm income is expected to increase 23.2 percent from 2020 to $ 116.8 billion for the current year, the highest level since 2013. This optimistic projection can be attributed to higher commodity prices resulting 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 their spending on new farm equipment and replace aging fleets. This, in turn, will increase Deere’s revenue.
Even though government support is expected to decline this year, total cash receipts from crops in the United States are likely to increase 17.9% year over year due to higher commodity prices. US customer sentiment has improved in recent quarters with strong exports to China. Considering these factors, Deere projects net income for fiscal 2022 in the range of $ 6.5 to $ 7 billion, which suggests an increase from $ 5.96 billion for fiscal 2021.
Optimistic forecasts for farm equipment sales bode 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 Sod segment, Deere expects sales of large farm equipment in the United States and Canada to increase by approximately 15% in fiscal 2022. Small farm and sod equipment is expected to increase by 15 to 20%. In Europe, industry sales are expected to increase by 5%, as rising raw material prices favor trading conditions in the arable crop segment and dairy prices remain resilient. In South America, sales of tractors and combines are forecast to increase by 5%.
Net sales of Deere’s Precision Production and Agriculture segment are expected to increase 20% to 25% in fiscal 2022. The segment’s operating margin is estimated to be 20% to 21%. The company is also seeing improvement in the Construction & Forestry segment. Sales in the North American earthmoving and compact construction machinery industry are forecast to increase by 5-10%. The end markets for earthmoving equipment and compact equipment are expected to remain strong in FY 2022, driven by continued strength in the housing market, increased activity in the oil and gas sector as well as market growth. strong investment programs from independent rental companies. Sales of forestry equipment are forecast to increase by 10-15% as demand for lumber remains strong. Construction & Forestry segment sales are expected to increase 10-15% and operating margin is expected to be 13.5% -14.5% in fiscal 2022.
Advanced agricultural technology to fuel growth
Deere is well positioned for long-term growth, supported by continued investments in new products and geographies. Focusing on launching innovative products with advanced technologies and features as well as investing in precision agriculture offers a competitive advantage. The company recently launched the ExactRate and AutoPath planter applied fertilizer systems. Deere plans to revolutionize agriculture with technology and make farming 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.
Deere shares have gained 44% in the past year, compared to the industry’s 39% growth.
Image source: Zacks Investment Research
Zacks rank and actions to consider
Deere currently wears a Zacks Rank # 3 (Hold).
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