Deere (DE) Benefits From Strong Demand Despite Cost Headwinds
Deere & Company DE has been gaining from strong replacement demand and need for its construction equipment despite persistent elevated costs and supply-chain challenges plaguing the industry at large.
The company's effort to improve pricing is also aiding growth. Product launches, equipped with the latest technology to make farming automated, will continue to provide Deere with an edge over its competitors.
Shares of this Zacks Rank #2 (Buy) company have gained 38.5% in the past year compared with the industry’s growth of 36.4%.
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Solid Demand to Drive Top-line Growth
Deere’s order books are already filled till the fourth quarter of fiscal 2023. This reflects improved market demand. Also, replacing aging equipment will support Deere’s top-line performance.
Backed by its solid performance in the fiscal second quarter, Deere expects net income for fiscal 2023 between $9.25 billion and $9.50 billion.
Strong Segmental Performance to Drive Results
In the United States and Canada, industry sales for construction and compact construction equipment are expected to be flat to up 5% in fiscal 2023. Sales for the Construction & Forestry segment are projected to be up 10-15% in fiscal 2023 and the operating margin is likely to be 18-19% in fiscal 2023.
End markets are expected to be steady as oil and gas, U.S. infrastructure spending and capital expenditure programs from the independent rental companies offset a moderation in the residential sector.
With the U.S. Infrastructure Investment and Jobs Act earmarking $110 billion to fund road repairs and other transformational projects over the next five years, this represents a massive opportunity for the Construction & Forestry segment.
The Production and Precision Agriculture segment’s sales are expected to be up 20% in fiscal 2023 on positive price/cost. The segment’s operating margin is expected between 25% and 26%, indicating a solid financial performance across various geographical regions.
The Small Agriculture and Turf segment’s net sales are expected to be up flat to up 5%, while its operating margin is forecast between 13.5% and 16.5% for fiscal 2023.
Deere will benefit in the long run from rapid growth in global population and income, as well as rising worldwide infrastructure and food consumption needs.
Positive Farm Fundamentals Bode Well
The USDA (U.S. Department of Agriculture) projects net farm income at $136.9 billion for 2023, suggesting a 15.9% dip from that reported in 2022. The decline is mainly due to elevated production expenses and lower direct government payments. Nevertheless, despite this decline, net farm income in 2023 will be 26.6% above the 20-year average (2002-2021) of $108.1 billion in inflation-adjusted dollars.
Farm size has been on the rise in the United States, which requires more laborers. Given the escalation in labor costs, farmers are resorting to farming equipment to replace labor. The U.S. agricultural machinery market is projected to reach $52.73 billion by 2027, seeing a CAGR of 3.3% over 2021-2027. This bodes well for Deere.
Innovations and Expansions to Enhance Growth
Deere is well-poised for growth over the long term, backed by steady investments in new products and geographies. The company will benefit from a concerted focus on launching products with advanced technologies and features, which gives it a competitive advantage.
It remains focused on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process. Through the effective use of technology, customers can achieve improved profitability, productivity and sustainability.
Elevated Costs & Supply Issues Remain Headwinds
Deere has been affected by rising material, labor and logistical costs. The company reported a 20.3% jump in its cost of goods sold in the second quarter of fiscal 2023. This is likely to persist in the upcoming quarter.
Also, supply-chain issues led to delays in the deliveries of some parts, causing partially completed machinery to stack up at assembly plants as the company waited for the parts to arrive. This resulted in factories becoming less efficient lately. Consequently, overhead spend has been high. Higher SG&A and R&D spend is also weighing on margins.
Meanwhile, Deere is assessing its cost structure by reviewing organization efficiency and footprint assessment, which, in turn, will help improve margins. Its price realization action is expected to offset higher material and freight costs.
Other Stocks to Consider
Some other top-ranked stocks from the Industrial Products sector are Worthington Industries, Inc. WOR, The Manitowoc Company, Inc. MTW, and W.W. Grainger, Inc. GWW. WOR and MTW flaunt a Zacks Rank #1 (Strong Buy) at present, and GWW has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Worthington Industries has an average trailing four-quarter earnings surprise of 14.9%. The Zacks Consensus Estimate for WOR’s fiscal 2023 earnings is pegged at $5.65 per share. The consensus estimate for 2023 earnings has moved north by 22.6% in the past 60 days. Its shares gained 57.9% in the last year.
Manitowoc has an average trailing four-quarter earnings surprise of 256.3%. The Zacks Consensus Estimate for MTW’s 2023 earnings is pegged at $1.12 per share. The consensus estimate for 2023 earnings has moved 7.8% north in the past 60 days. MTW’s shares gained 88.3% in the last year.
The Zacks Consensus Estimate for Grainger’s 2023 earnings per share is pegged at $35.86, up 1% in the past 60 days. It has a trailing four-quarter average earnings surprise of 9.1%. GWW gained 68.4% in the last year.
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