Deere & Company (DE) manufactures and distributes various industrial equipment worldwide. The stock seems ready to move on higher after a double-dip correction that sent shares tumbling by over 10% from their peak on two separate occasions. Broader market forces are major contributors to the latest bounce.
However, the real question on investors’ minds is whether this is the beginning of the next leg up, or if Deere will end up in the headlights of yet another correction. Indeed, a pullback from the $380-390 level of resistance could paint an ugly technical picture for DE going into the year’s end.
While the valuation may seem suspect to some after more than doubling off its 2020 pre-pandemic highs, many intriguing long-term catalysts point to shares of DE not being nearly as expensive as they could be.
In any case, I remain bullish on Deere and think the fundamentals could support another leg higher, where shares break through the $400 mark. (See Analysts’ Top Stocks on TipRanks)
Deere’s Acquisitions Are Getting Very Exciting
Undoubtedly, many view Deere as more of a cyclical play on farming. A lot of durable manufacturing firms tend to boom when times are good, only to fall further than the broader indices when the economic cycle contracts.
Deere’s incredibly generous 18% dividend hike points to positive trends, which may extend beyond just a favorable cyclical upswing. Indeed, Deere has a front-row seat to agricultural technology, as demonstrated by compelling acquisitions it had made over the years.
With deep pockets and a healthy balance sheet, the firm has the ability to grow via accretive M&A. Lately, Deere’s deals have become more exciting. The company recently inked an agreement to acquire AI-powered agrotech firm Bear Flag Robotics in a deal worth $250 million.
Is the deal just science fiction? Or could autonomous tractor fleets be closer than we think?
I think the latter. These days, we hear about autonomous vehicle technology as being one of the next significant technological trends. Still, there are many challenges facing tomorrow’s fully-autonomous vehicles, not to mention regulatory hurdles across numerous localities.
Bullish on Bear Flag
Indeed, autonomous farming seems more within grasp, given fewer variables to worry about on farmland. Safety is still of utmost importance, regardless of setting. Still, the probability of surprises that AI technologies can’t effectively react to is far lower on a farmer’s private property.
Now, autonomous farming may not be nearly as exciting as an autonomous vehicle, but it’s a magnificent first step. Furthermore, AI-driven agricultural equipment can make the tricky business of farming that much more lucrative, given the labor and cost savings, not to mention improved efficiencies.
The real game-changer for Bear Flag Robotics may very well be that it can be retrofitted in today’s machines. A fascinating frontier for those in the agricultural space.
Can Deere Keep Up Its Earnings Beats?
Deere has been firing on all cylinders of late, handsomely beating quarterly estimates regularly. On November 24, Deere’s fourth-quarter earnings will be on tap, and the stage could be set for another beat. That may give DE stock the boost it needs to sustain a rally to much higher levels after consolidating for nearly a year.
Deere has delivered great bottom-line beats for seven consecutive quarters, thanks in part to a magnificent management team that deserves respect for how it effectively navigated through 2020.
The company can’t keep crushing quarterly earnings. Still, the company has a lot going for it beyond the continued economic expansion. Tech-driven acquisitions make Deere worthy of a premium multiple versus the industry average.
Right now, Deere trades in line with industry averages at around 2.6 times sales and 14.1 times cash flow. On a price-to-earnings front, though, the stock is skewed towards the cheaper end of the industry range.
Wall Street’s Take
Turning to Wall Street, Deere has a Moderate Buy consensus rating, based on four Buys and two Holds assigned in the past three months. The average Deere price target of $403.67 implies 19.3% upside potential.
Analyst price targets range from a low of $354.00 per share to a high of $440.00 per share.
The Bottom Line on Deere
While conditions will become somewhat less favorable as economic growth winds down, I find it’ll be tough to stop Deere in its tracks with all the innovation going on behind the scenes.
Such innovation makes Deere more than just any cyclical company. For that reason, I am Bullish on DE stock, even if economic growth for 2022 ends up being more muted than expected.
Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
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