Hearing about a huge win these days in earnings reports is something of a minor miracle and one that Deere & Company (NYSE:DE) pulled off in a big way. The company turned in earnings approaching nearly double what analysts expected, and considering the year we've had in commodities, looking for more gains out of the agricultural products sector almost seems like a foregone conclusion.
Rolling Over the Expectations
Deere turned in a monster win for earnings, bringing in $3.87 per share against an expected $2.14 per share. That's nearly double what the forecasts called for, and the numbers actually get better from there. Earnings amounted to $1.224 billion for the first quarter, which is better than double what the company posted this time last year, at $517 million.
The revenue figures were also a win, though perhaps not quite as big a win overall. Worldwide net sales and revenues came in at $9.112 billion for the first fiscal quarter of 2021, which is a 19% increase from the same time last year. Most of that was net sales of equipment, which turned in a huge quarter of $8.051 billion. That compares nicely—though not quite as explosively—to the same time last year of $6.53 billion.
The biggest wins for Deere, according to CEO and chairman John C. May, were in agriculture and construction. Sales were clearly up on these fronts, and Deere could also keep more of its revenue as profit thanks to what May called a “smart industrial operating strategy”.
Analysts Getting on Board With the Tractor King
Analyst sentiment has been increasingly bullish for Deere over the last six months, and based on our latest research, staying out of Deere & Co. might be a very bad move.
The company has enjoyed a consensus rating of “buy” for the last six months, and it's been increasingly focused for that whole time frame. Six months ago, there was some skepticism for Deere as there were two “sell” ratings, four “hold”, and 12 “buy” ratings driving the consensus rating. The skepticism started peeling away three months ago, when there was only one “sell” rating, along with five “hold” and 14 “buy.” A month ago, skepticism was removed from the field altogether as the rating was now comprised of five “hold” and 16 “buy” ratings, where it stands today.
Meanwhile, the price target has only increased that whole time. Six months ago, it started at $187.98, before jumping to $223.37 three months ago. A month ago, it jumped once again to $274.68, and, right now, stands at $279.95. Given that the company's share price is currently trading at $331.69 per share, the current price target represents significant downside, which is bizarre given the numbers that Deere's put up for the last quarter.
Watching the Commodities Market
The biggest indicator of Deere's success is likely to come from the commodities market. Since a large portion of Deere's stock in trade comes from generating those commodities—Deere tractors plant pretty much everything from wheat to corn to cotton and beyond—fluctuations in those markets are likely to draw attention from farmers. Reports suggest that farmers are already planning to plant more acreage; yesterday, one of the biggest movers in the pre-market was Nutrien (NYSE:NTR), a Canadian fertilizer company that saw demand on the rise thanks to rising crop prices and farmers' plans to take advantage of those gains by planting more acreage. It's not out of line, therefore, to suggest that farmers are also likely to improve their tractors, combines, and other large-scale farming equipment to keep up with that increased acreage planting. So if crop prices remain high—and the recent impact of the cold snap on middle America suggests it might, not to mention some ongoing issues in China, who was a major commodities buyer through most of 2020—Deere's stock price is likely to do likewise.
It's also important to note that Deere isn't just about farming equipment. Deere is also a construction leader, and we all know what's been happening in the homebuilder space for the last several months now. There's little sign that market's going to slow down, either; while a lot of the market has likely been front-loaded—you can only build so many houses—and the everything-at-home doctrine is taking some hits thanks to vaccines and therapeutics for COVID-19, there's likely still solid demand for new houses that can better accommodate people who are constantly at home.
It's looking like a very good time to be a Deere investor going forward, thanks to likely ongoing demand for pretty much all of its heavy equipment. It's going to have to fend off some competition in this sector, like Kubota (OTCMKTS:KUBTY) and others, but Deere has excellent name recognition and a reputation stretching back decades. That's going to give it an advantage going forward into a market that is likely eager to pick up new tractors and the like.
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