Stock Analysis & Ideas

Deere (NYSE: DE): Recent Rally Kick-Starting this Stock

Story Highlights

Deere’s latest quarterly beat could mark the beginning of a boom heading into a recession year. With so many catalysts that could propel earnings, shares still look cheap after last week’s impressive run.

Deere (NYSE: DE) has seen its stock price surge following the release of some applaud-worthy fourth-quarter results. Profits and sales surged sharply as the company began to feel the perfect combination of strong demand and relief from supply chain woes. As the agricultural machinery maker makes a run for new all-time highs, I still view the name as one of the worthier industrial stocks heading into a recession year. The stock’s still cheap, and the post-quarter jump may very well be the start of a sustained move higher. I am bullish on Deere stock.

Deere Puts an Exclamation Mark on Its Impressive Fourth Quarter

For the fourth quarter, Deere clocked in an EPS of $7.44, beating the consensus of $7.11. Revenue took off by 40% to $14.3 billion, and operating margins rose to around 18%. All in all, it was a sensational quarter.

Price increases across its lineup of equipment helped power the impressive profitability surge. Looking ahead, demand is expected to stay strong, with order books reportedly full for certain types of equipment until the third quarter of next year. As supply-side constraints continue to alleviate over the coming months, it seems unlikely that any other industrial stock will be able to run like Deere.

Deere showed us all just how much pricing power it has. With inflation continuing to surge, Deere could raise prices on its equipment, and customers won’t think twice about submitting their orders. Indeed, Deere has done a magnificent job of moving through a rough inflationary environment.

Even as a recession begins, the farming scene will likely continue flexing its muscles, with farmers looking to replace their worn-out old tractors and combines. Undoubtedly, the farming equipment replacement cycle is alive and well.

In 2023, management expects net sales in production and precision agriculture to be in the 15-20% range.

Technological Advancements Could Extend Equipment Replacement Cycle

When it comes to the cyclical industrials, the booms and busts tend to be outsized. With robust demand pointing to a boom in agriculture and construction equipment, Deere could easily be in for another one of its big stock spikes. Even after most farmers get their new tractors (unlikely by next year’s end), Deere’s ongoing innovations could help extend the current replacement cycle.

Deere’s a tech-savvy company that’s serious about automating the farms of the future. Unlike the many unprofitable hyper-growth companies that can only propel their share prices with promising stories, Deere doesn’t need to get investors excited to send its stock higher. It has strong earnings to support upward moves in the share price.

With a robust balance sheet and some of the most capable managers in the business, Deere is ready to invest in the next generation of equipment. The company has been hiring tons of coders to help make the lives of farmers easier.

Undoubtedly, it’s tough to be a farmer, but somebody has to get their hands dirty to feed a growing world population. With automated tractors that can take care of the lion’s share of the work, the business of farming is slated to become more lucrative with time.

Even after last week’s impressive post-earnings surge, shares of Deere don’t at all trade at a “growthy” tech multiple. I think it should.

At writing, DE stock trades at a modest 22 times trailing earnings and 2.8 times sales. With a 1.1 beta, Deere shares are just a tad more volatile than the broader S&P 500.

As Deere’s managers continue to make the most of the boom ahead while investing heavily in automation and other innovations, it’s not a mystery why so many Wall Street analysts are still upbeat on the name at these heights.

Is DE Stock a Buy?

Turning to Wall Street, DE stock has a Moderate Buy consensus rating based on 10 Buys, six Holds, and zero Sells assigned in the past three months. The average Deere price target is $471, implying an upside potential of 6.43%. Analyst price targets range from a low of $342.00 per share to a high of $582.00 per share.

Conclusion: DE Stock is Firing on All Cylinders

Deere’s latest quarter really was that impressive. Management is firing on all cylinders, moving past supply headwinds effectively while continuing to invest in the future. As the company looks to feed the demand for its latest line of equipment, there’s no telling how much higher the stock can run from here.

Disclosure

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