Deere’s Shares Hit All-Time High on Strong Earnings Forecast; Buy with Target Price $235

Deere & Company, the world’s largest makers of farm equipment, forecasts net income to be about $2.25 billion for the full year after the company reported net income of $811 million, or $2.57 per share for the third quarter, sending its shares up over 6% to a record high of $202.81.

However, many uncertainties remain regarding the effects of the global COVID-19 pandemic that could negatively affect the company’s results and financial position in the future.

Agricultural, construction and forestry equipment manufacturer said for the first nine months of the year, net income attributable to Deere & Company was $1.993 billion, or $6.30 per share, compared with $2.532 billion, or $7.87 per share, for the same period last year. Quarterly profit came in at $2.57 per share and equipment sales fell 12.4% on a year-on-year basis.

Deere said its worldwide net sales and revenues decreased 11%, to $8.9 billion, for the third quarter of 2020 and declined 12%, to $25.8 billion, for nine months. Net sales of the equipment operations were $7.9 billion for the quarter and $22.6 billion for nine months, compared with $8.9 billion and $26.2 billion last year.

“We believe DE’s 3Q is beginning to show the potential around the margin improvement program, aimed at driving 15% mid-cycle segment margins. We raise our numbers for FY21-23 but still only get to 13.8% segment margin by FY23. Achieving the 15% target by FY22 would add nearly $2.00 to our above-consensus estimate. A more robust replacement cycle could provide further upside,” said Stephen Volkmann, equity analyst at Jefferies.

Deere’s shares closed 4.39% higher at $199.50 on Friday. However, the stock gained 43% since late May and up over 15% so far this year.

Deere stock forecast

Fourteen analysts forecast the average price in 12 months at $189.38 with a high forecast of $235.00 and a low forecast of $154.00. The average price target represents a -5.07% decrease from the last price of $199.50. From those 14 analysts, nine rated “Buy”, four rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley target price is $181 with a high of $281 under a bull scenario and $63 under the worst-case scenario. Jefferies raised the price target to $230 from $200.

Other equity analysts also recently updated their stock outlook. Deere & Company had its price target increased by Goldman Sachs Group to $209 from $182. Deutsche Bank cut from a buy rating to a hold rating and set a $185.00 price objective for the company. BMO Capital Markets boosted their price target on Deere & Company from $150.00 to $235.00 and gave the stock an outperform rating in a report on Monday.

We think it is good to buy at the current level and target $235 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“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. We like the ongoing Ag replacement cycle long term, although FY20 is likely to represent a pause in the Ag replacement cycle as US/China trade tensions, ASF and poor US planting all weigh on sentiment,” said Courtney Yakavonis, equity analyst at Morgan Stanley.

“With incremental commentary around cost normalization and benefits from voluntary separation/potential international footprint reductions, we see a combination of more supportive margins and relative defensiveness of Ag markets (in an increasingly choppy macro backdrop) driving a favourable risk-reward for FY20,” he added.

Upside and Downside risks

Upside: 1) Recovery in commodity prices and US cash receipts. 2) Better than expected Wirtgen top-line synergies. 3) U.S. infrastructure bills pass, driving outsized C&F growth – highlighted by Morgan Stanley.

Downside: 1) Commodity prices truncate ongoing replacement cycle. 2) Excess Used inventories limit pricing power and demand pull-through. 3) Mis-execution around Wirtgen synergies and $500b cost-cutting plan. 4) Supply chain woes and price/material headwinds persist.