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Vivek M. Kumar
Deere

Deere & Company, the world’s largest maker of farm equipment, reported better-than-expected earnings in the first quarter on improved demand for farm and construction machines, sending its shares up over 7% in pre-market trading on Friday.

Agricultural, construction and forestry equipment manufacturer reported net income of $1.224 billion for the first quarter ended January 31, 2021, or $3.87 per share, compared with net income of $517 million, or $1.63 per share, for the quarter ended February 2, 2020. That was nearly doubled than the Wall Street consensus estimates of $2.12 per share.

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The Moline, Illinois-based company said its worldwide net sales and revenues increased 19%to $9.112 billion. Equipment operations net sales were $8.051 billion for the quarter, compared with $6.530 billion in 2020.

Deere forecasts net income attributable for fiscal 2021 in a range of $4.6 billion to $5.0 billion, an upgraded from the previous forecast of $3.6 billion-$4.0 billion.

“With 1Q Equip Ops margins of 17.1% coming in ~6ppts+ above Street & well above DE‘s 15% target during the seasonally weakest Q of the year, we continue to see an upside to DE‘s mid-cycle targets. We expect a strong reaction to both the 1Q print and DE‘s 25%+ raise to FY21 net income guidance,” said Courtney Yakavonis, equity analyst at Morgan Stanley.

Following this upbeat result, Deere‘s shares, which surged over 55% last year, rose over 7% to $321.79 in pre-market trading on Friday.

Deere Stock Price Forecast

Seventeen analysts who offered stock ratings for Deere in the last three months forecast the average price in 12 months of $309.63 with a high forecast of $400.00 and a low forecast of $220.00.

The average price target represents a 3.12% increase from the last price of $300.25. From those 17 analysts, 12 rated “Buy”, four rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $341 with a high of $467 under a bull scenario and $146 under the worst-case scenario. The firm gave an “Overweight” rating on the agricultural equipment manufacturer’s stock.

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Analyst Comments

Deere (DE) is one of the highest quality, most defensive names within the broader Machinery universe, given an historically lower cyclicality of Ag Equipment and history of strong management execution. FY21 should mark a tangible acceleration in the NA large ag replacement cycle, as commodity tailwinds are complemented by moderating trade headwinds and improving farmer sentiment,” Morgan Stanley’s Yakavonis added.

“With management continuing to execute against its 15% mid-cycle operating margin target, we see continued momentum in DE‘s margin improvement narrative – representing one of the most attractive idiosyncratic margin improvement narratives in the broader Machinery group.”

Upside and Downside Risks

Risks to Upside: 1) Recovery in commodity prices and US cash receipts. 2) Better than expected margin improvement efforts. 3) US infrastructure bills pass, driving outsized C&F growth – highlighted by Morgan Stanley.

Risks to Downside: 1) Commodity prices truncate the ongoing replacement cycle. 2) Excess Used inventories limit pricing power and demand pull-through. 3) Mis-execution around 15% operating margin target. 4) Supply chain woes and price/material headwinds persist.

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