Stock Analysis & Ideas

Electrification Opportunity Could Power Deere Stock Higher

Deere (NYSE: DE) stock is back on the retreat towards multi-month lows on the back of labor strike woes and broader macroeconomic concerns.

Although there are many challenges, most notably at the macro level, long-term trends are still at play, and the fundamentals seem as strong as ever. There’s also an electrification opportunity, as farmers look to upgrade current machinery for something more environmentally friendly.

Such a longer-term “electrification” tailwind, I believe, will remain at the end of the day, once strike-induced production pressures, and Omicron’s impact on supply chains fade in time.

With a more generous six-year deal to be inked, the 2021 Deere strikes are moving into the rear-view mirror. However, some damage has already been done, with elevated costs on machinery and a swelling order backlog.

I remain bullish and think that nothing much had changed over the past few months with regards to the long-term story, which seems as attractive as it was when the stock was flirting with nearly $400 per share back in May 2021.

Deere Moves Through Rough Patch Post-Earnings

For Q4 2021, Deere clocked in per-share earnings of $4.12, beating the analyst consensus of $3.90. Revenue was up an impressive 16% year-over-year despite navigating through ongoing COVID-induced challenges.

Despite the mildly decent result, investors weren’t enthused, even with a generous 15% dividend hike. Undoubtedly, management seems confident in the new year.

Still, with Omicron variant uncertainties, investors would rather take a raincheck on Deere than invest in a name that could continue to face intense volatility over the near term.

While the fourth quarter wasn’t much to write home about, recent weakness in Deere stock seems overblown, given the relatively depressed valuation (18.9 times trailing earnings and 2.6 times sales), and innovative capabilities that seem to strengthen with every acquisition the company makes.

Deere Continues Making Smart Acquisitions

The 2021 labor strike and COVID-induced headwinds acted as a one-two punch to Deere, but the company is still standing.

The strike-induced impact on production and elevated costs have likely already been baked into the share price. As the company moves on to meet its order backlog, there could be much in the way of positive surprises in the new year.

Add continued acquisitions into the equation, and it’s clear that management is still focusing on the long-term opportunity at hand. Once the dust clears over the medium term, it may be tough to keep Deere down, as it leverages technologies to give customers a solid reason to upgrade.

Such innovations could easily justify a noticeable higher price tag and allow the company to raise prices without suffering a considerable loss of sales to rivals.

Deere’s acquisition of autonomous tractor startup Blag Flag Robotics in a deal worth $250 million was remarkable and should have got investors excited in the future over at Deere.

The pace of acquisitions hasn’t slowed, with the company scooping up Kreisel Electric and AgriSync. Deere took a majority stake in the former firm, which should accelerate its battery tech in a shift toward electrifying its popular farming equipment.

The acquisitions should get investors excited, as they stand to strengthen the firm’s long-term growth profile. For now, though, investors seem to be more concerned with another year of potential headwinds and the possibility of a cyclical downswing.

In due time, Deere will pull through, and its innovations could help it propel higher, even if macro conditions weaken further at the hands of Omicron or other COVID-19 variants in the new year.

For now, expect Deere to continue exploring M&A opportunities to improve its electrification and autonomous hopes — two drivers that will be critical to Deere’s next leg higher.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, DE stock comes in as a Moderate Buy. Out of 15 analyst ratings, there are 11 Buy recommendations, three Hold recommendations and one Sell recommendation.

The average Deere price target is $423.29. Analyst price targets range from a low of $320 per share to a high of $485 per share.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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