Why John Deere is a bellwether despite 2024 outlook: Analyst

Deere & Company (DE) released its fourth-quarter earnings, beating Wall Street expectations on both the top and bottom lines. Shares of the farming equipment manufacturer are moving down in early morning trading on Thursday, however, because the company pulled back on its 2024 full-year outlook to $7.5-7.75 billion, down from $10.17 billion in fiscal 2023.

Oppenheimer Senior Analyst and Executive Director Kristen Owen joins Yahoo Finance to discuss the company's performance, outlook, and why she is still bullish on Deere, calling it a bellwether.

Owen explains her bullish stance:

"We have been in this unprecedented level of optimism over the last 2-3 years, just given commodity prices had a lot of volatility in commodities in the backdrop related to geopolitical events, related to COVID. I would say we were in sort of an unprecedented setup coming into this year. We're now seeing some moderation. We heard from last week from the USDA, net farm income is expected to come down about 27% in 2024. That's an inflation-adjusted number, but it is coming back to a level that is about on par with the 20-year average, so that we are now seeing in North America the expectation that equipment sales are also likely to be down in that 10 to 15[%], Deere probably closer to 20 given its relatively market size and what we heard this morning."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Shares of Deere are moving to the downside by about 4%. The company beat the Street's expectations on the top and bottom line. Deere, though, trimmed its profit outlook on falling crop prices. Industry sentiment has been relatively weak in recent months, but our next guest remains bullish on Deere, calling the world's largest farm machinery producer a bellwether and best-in-class operator.

For a deeper dive into the company's results, we're joined by Kristen Owen, Oppenheimer Senior Analyst and Executive Director. Kristen, thanks so much for taking the time here this morning here. Why-- why a best-in-class operator here and that title that you're giving John Deere?

KRISTEN OWEN: Yeah. Thanks, Brad, for having me. You know, John Deere, as the market leader, it would be easy to say, well, as the leader, they should be best-in-class. But what we really like about this stock and what we think is differentiated over a long time horizon is that Deere was very early to see the opportunity set in technology and how technology can be used to make farmers more productive.

So that journey started over 20 years ago really, laid a foundation for Deere to have a head start ahead of the competition. We are now seeing that competition get to where Deere was 10, 15 years ago-- Deere now incorporating tools like AI, onboard intelligence.

We think that that's going to continue to spin the flywheel for them and really sets them ahead of their competitors. Now, you've got some near-term dynamics related to the cycle that I'm sure we're going to talk about this morning. But that's why we continue to believe that they are best-in-class, best executers, and best positioned from a technology perspective.

RACHELLE AKUFFO: And, Kristen, we did see some pressure on the stock price today, mostly based on the fiscal outlook for 2024, especially looking at large agriculture in the US and Canada-- expecting that to be down 10% to 15%. How worrying is that in terms of, especially, as this is meant to be a bellwether here?

KRISTEN OWEN: Rachelle, we have been in this unprecedented level of optimism over the last two to three years just given commodities prices. Have had a lot of volatility in commodities backdrop related to geopolitical events, related to COVID. So I would say we were in an unprecedented setup coming into this year. We're now seeing some moderation.

We heard last week from the USDA, net farm income is expected to come down about 27% in 2024. That's an inflation-adjusted number. But it is coming back to a level that is about on par with the 20-year average, so that we are now seeing in North America the expectation that equipment sales are also likely to be down in that 10 to 15, Deere probably closer to 20 just given its relative market size and what we heard this morning-- sort of consistent with where we are seeing net farm income and those farm balance sheets.

So it's not that we're expecting something to fall off the cliff. It's, rather, this is a return to some more normalized activity levels.

BRAD SMITH: How much of the play for John Deere is artificial intelligence? I mean, this is an interesting new thread within how the business is going to be operating some of the machinery, be pushing inventory onto new prospective clients as well.

KRISTEN OWEN: Without question, I think that there is some benefit that is baked into the multiple for John Deere relative to some of its peers just given its presentation of that technology story. Where we think it starts to flow through on the fundamentals, and as we all know, the sentiment will move ahead of the fundamentals, is what it can do from a business model perspective. If Deere is able to charge for the incremental productivity that that onboard intelligence is providing-- and it's really simple stuff. I mean, we're talking about sensing what's happening on the field and acting in real time rather than a farmer having to get out of the cab and adjust his settings-- he can do that through the computer. That's real productivity savings, and we believe that Deere can benefit from those productivity savings.