Deere & Company DE has been displaying an impressive performance, primarily driven by upbeat construction markets and focus on the Wirtgen acquisition. However, elevated expenses and unfavorable foreign currency remain headwinds.
The company, with a market capitalization of approximately $47.5 billion, has an estimated long-term earnings growth rate of 7.8%.
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Deere
Positive Growth Projections: The Zacks Consensus Estimate for earnings is currently pegged at $10.27 for fiscal 2019, reflecting year-over-year growth of 9.3%. For fiscal 2020, the Zacks Consensus Estimate for earnings is pegged at $11.58, highlighting year-over-year growth of 12.7%.
Looking at Deere’s price-to-earnings ratio, shares are underpriced at the current level, which seems to be attractive for investors. The company has a trailing P/E ratio of 15.1, which is below the industry average of 16.
Growth Drivers in Place
Deere projects Construction & Forestry equipment’s global sales to be up 11% in the current fiscal. This will be backed by strong demand for equipment and the Wirtgen acquisition. With order books extending into the fourth quarter, the segment seems on track for improved results in the remaining half of the fiscal.
In forestry, global industry sales are expected to be flat to up 5%, primarily driven by higher demand in EU28 countries and Russia. The segment’s operating margin is projected to be about 11.5%. The economic environment for the construction, forestry and road building industries holds promise, and continues to support elevated demand for new and used equipment.
For fiscal 2019, U.S. GDP, total construction investments, housing starts and oil activity remain at supportive levels for equipment demand. Equipment rental utilization remains high and rental rates will continue to improve in 2019. Global transportation investment this calendar year is anticipated to be up about 4%, spurring demand for road construction equipment, such as milling machines, rollers and asphalt pavers, which are all important product lines for Wirtgen. It should be noted that Deere acquired the world’s leading road-construction equipment maker, Wirtgen for $5.2 billion in cash and debt in December 2017. The buyout significantly enhanced Deere's exposure to global transportation infrastructure. The company has updated its synergy target to 125 million euro by 2022.
Deere expects Agriculture and Turf equipment sales to increase about 2% in fiscal 2019. Industry sales of agricultural equipment in the United States and Canada are anticipated to be flat to up 5%. This will be backed by demand for both large and small equipment.
Per the USDA’s latest available projections, net farm is anticipated to increase 10% year over year in 2019 to $69.4 billion, after a decline of 16% in 2018. Further, the USDA has announced a $16-billion aid program for American farmers who have been affected by the U.S. trade war with China. This is likely to improve farmer sentiment and bolster equipment sales.
Favorable Rank, Score Combination: Deere currently carries a Zacks Rank #3 (Hold) and has a VGM score of B. Here V stands for Value, G for Growth and M for Momentum. The company’s score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. In fact, our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3, make solid investment picks.
Headwinds for Deere
Citing ongoing concerns over the impact of the escalating trade war between the United States and China, weakening agricultural market for fiscal 2019, Deere lowered its expectation of equipment sales year-over-year to 5% from the prior expectation of 7%. The forecast also factors an unfavorable impact of 3% for foreign-currency translation for the ongoing fiscal, higher than the previous projection of an impact of 2%. For the fiscal, the company anticipates net sales to increase about 5% year over year, down from the previously-guided growth of 7%. The expectation for net income for the fiscal is now at about $3.3 billion compared with its earlier expectation of $3.6 billion.
Further, Deere’s results continue to bear the brunt of higher costs for raw materials on account of the implementation of tariffs and logistics. It will continue to hinder the company’s margins till a resolution is reached.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Deere & Company Price and Consensus
Deere & Company price-consensus-chart | Deere & Company Quote
A few better-ranked stocks in the Industrial Products sector are Chart Industries, Inc. GTLS, Lawson Products, Inc. LAWS and Harsco Corporation HSC, each sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Chart Industries has an estimated earnings growth rate of 52.9% for the ongoing year. The company’s shares have gained 10.1%, in the past year.
Lawson Products has an expected earnings growth rate of 24.5% for the current year. The stock has appreciated 45.5% in a year’s time.
Harsco has a projected earnings growth rate of 9.1% for 2019. The company’s shares have gained 6.5%, over the past year.
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