Stock Analysis & Ideas

Easing Fears and Innovative Products Could Power Deere Stock Higher

Story Highlights

Deere stock’s recent relief rally has been nothing short of remarkable. As recession fears fade, focus on Deere’s tech-driven strategy could help propel the cheap stock to new heights.

With shares of popular farming equipment maker Deere (DE) trending higher, it seems like too much recession risk was baked in just over a month ago. Undoubtedly, the cyclical nature of the industry makes the company vulnerable to economic downturns. However, as the company continues to buck the trend with solid results while continuing to shed light on its tech-driven innovations, I think it will be tough to stop Deere in its tracks.

Shares of the company have performed well despite all the macroeconomic uncertainties. Indeed, Deere stock is up 5.2% year-to-date. It’s worth noting that shares have rallied significantly off their recent summer lows.

I am incredibly bullish on DE stock and would look to top up my personal stake on any dips moving forward.

Deere Stock on the Receiving End of Price Target Upgrades

Last week, Deere received two notable price target upgrades courtesy of Evercore ISI and Deutsche Bank. Evercore hiked its price target to $416 from $401 per share, while Deutsche hiked to $417 from $388 per share.

Undoubtedly, having such Wall Street analyst upgrades is a potential sign that the relief rally can sustain itself. Even after a remarkable run off its recent bottom, Deere stock remains incredibly cheap, likely because of its discretionary nature.

At writing, shares of DE trade at 2.4 times sales and 19 times trailing earnings, both below the construction and agricultural machinery industry averages of 6.0 and 28.3, respectively.

Indeed, farming equipment may be viewed as boring, but the modest valuation multiple on Deere stock, I believe, is unwarranted given its technological prowess.

In prior pieces, I praised Deere for its Investor Day and autonomous tractor, which, I thought, was an industry game-changer that warranted a considerable amount of multiple expansion. Though Deere’s multiple has expanded meaningfully over the past few weeks, I don’t think it’s too far-fetched to believe Deere could command more of a tech multiple.

The Case for Deere Stock Commanding a Much Higher Multiple

If Tesla (TSLA), an auto company, can be valued like an innovative tech firm, so too can Deere, as it moves forward with autonomous technologies that many may be sleeping on amid anxiety of a looming economic recession. Arguably, Deere is a better way to play autonomy than Tesla, given a fully-autonomous farm is likely to come before fully-autonomous cars roam the streets. Indeed, there are fewer variables to worry about and less in the way of liabilities should something go wrong.

The fully autonomous Deere’s 8R tractor was showcased at CES 2022, touting GPS guiding system technologies, among other intriguing innovations. It was easy to look past the conference unless you’re a farmer or farmhand. In any case, Deere’s autonomous tractors could fuel the beginning of an era as farmers look to improve productivity and profits while doing their part to feed the world.

With recent post-COVID-induced labor woes, the timing of Deere’s autonomous solution could not have come at a better time. The way I see it, Deere is a technology company that just so happens to be in the business of making farming and construction equipment.

Deere: Recession Risks Seem Overdone at This Juncture

Discretionary and economically-sensitive stocks have been doing incredibly well amid the latest relief rally. It’s possible that the market overestimated the severity and probability of the next recession. Deere and stocks like it have had an enormous weight lifted off their shoulders.

Though farmers may postpone the purchase of Deere’s latest and greatest autonomous tractors to a later date, I think the company is well-equipped to strengthen its market footing ahead of the next expansionary cycle.

Recessions aren’t good for anybody. However, when going on the hunt for stocks during tough times, it can pay dividends to look to the firms hungry to improve their competitive positioning as the tides go out.

Deere’s relentless focus on innovation could help it fuel a boom that could surprise many investors. Management believes its tech-driven agriculture and sustainability strategy could result in an incremental addressable market north of $150 billion. That’s a big deal. For now, Deere is leading the charge in agricultural innovation, and it’s hard to see any firm dethroning it as it looks to make the most of the opportunity at hand.

Is DE Stock a Buy?

Turning to Wall Street, DE has a Moderate Buy consensus rating based on 12 Buys and five Holds assigned in the past three months. The average Deere price target is $396.13, implying an upside of 8.2%. Analyst price targets range from a low of $325.00 per share to a high of $472.00 per share.

Takeaway – DE Stock’s Strategy Can Lead to Earnings Growth

Deere stock’s new precious agriculture strategy is exciting and could help the firm raise the bar on earnings and sales growth over the next few years. It’s not just the autonomy or electrification trends that could act as tailwinds; the company’s value-added services business could act as a driving force for margins.

Indeed, services have been a major source of multiple and margin expansion for many firms, including iPhone maker Apple (AAPL). With a strong brand and a wide moat surrounding its ecosystem, I view Deere as an intriguing company that seems to be doing a lot of things right to make the most of an emerging market opportunity it sees.

Despite the recent run, Deere stock still has a lot of wind to its back. Perhaps such tailwinds could help it steer out of the next recession without sustaining so much damage.


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