Deere & Company (DE) designs, manufactures, and distributes agricultural and construction equipment worldwide. I am bullish on the stock.
Wells Fargo’s Bet
Seth Weber of Wells Fargo initiated coverage of the stock and set a price target of $455, simultaneously declaring the stock as an overweight portfolio allocation.
According to Weber, Deere is “continuing to distance itself from the rest of our Machinery coverage with respect to embracing secular tailwinds around technology and sustainability,” and the company’s “evolving model… should support higher margins, more recurring revenue and make the model less dependent on machine sales.”
Wells Fargo sees Deere stock as a momentum play by placing an overweight rating on a stock that’s already increased in value by 16% year-to-date. Professor Elroy Dimson of the University of Cambridge recently discovered that S&P 500 stocks thrive under momentum scenarios; more specifically, “stocks that beat the S&P 500 in the preceding 12-months are likely to gain 17.5% on average in the following year.”
The claim that Deere stock has formed a momentum pattern can be consolidated by considering that it’s currently trading above its 10-, 50-, 100-, and 200-day moving averages. In addition, Deere’s RSI (59) remains in midpoint territory, suggesting that it’s not overbought.
Earnings Analysis
Deere reported its first-quarter results in February, and they were mind-blowing, to say the least. The firm posted a revenue beat of $247.8 million and an earnings beat of $0.66 per share, leading to its ninth straight earnings target outperformance.
To head into more detail. Deere’s Production & Precision Agriculture segment produced a net sales increase of 9% compared to this time last year. This segment is showing much promise, with the integration of autonomous technology being pivotal to the company’s sustained growth.
Furthermore, the Fortune 500 firm’s Small Agriculture & Turf and Construction & Forestry segments posted annual net sales increases worth 5% and 3%, respectively. I expect solid growth from the firm’s construction & forestry segment for 2022 as pandemic reopenings will likely translate into equipment renewals for greenfield projects.
Last of all, Deere’s operational efficiency has clearly improved of late, with its EBITDA skyrocketing by 23.7% during the past year, even as input costs have risen at a phenomenal rate.
Valuation
In the wake of its successful first quarter, Deere’s stock is once more undervalued. The stock’s P/E ratio of 21.5x is met with a PEG ratio of 0.33x.
By using the reciprocal of the stock’s PEG ratio, it can be concluded that Deere’s EPS growth has outpaced its valuation multiple, meaning that the market hasn’t yet fully priced in DE’s intrinsic value.
Wall Street’s Take
Turning to Wall Street, Deere & Company has a Moderate Buy consensus rating, based on eight Buys, three Holds, and one Sell assigned in the past three months.
The average DE stock price target of $434.18 implies 9.2% upside potential.
The Bottom Line
This machinery giant has shown robust growth for many years, and that’s partly why its stock price has blossomed. It’s clear that DE stock is set for another year of solid growth, and I won’t be surprised if we see it outperform the market once more.
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