Deere Earnings Beat Wall Street Estimates; Forecasts Net Income Between $3.6-4.0 Billion for FY2021

Deere & Company, the world’s largest makers of farm equipment, reported better-than-expected earnings in the fourth quarter as demand for farm machines bounced on higher crop prices and government subsidy payments.

Agricultural, construction and forestry equipment manufacturer reported net income of $757 million for the fourth quarter ended November 1, 2020, or $2.39 per share, beating market expectations of $1.55 per share, up compared with net income of $722 million, or $2.27 per share, same period last year.

“The coronavirus pandemic was undoubtedly a headwind for Deere in fiscal 2020, but the company managed to post resilient operating margins in the fourth quarter, largely due to cost-cutting and solid pricing. We are raising our fair value estimate to $187 per share from $183 due to a more favourable near-term outlook than we previously modelled. In fiscal 2021, we expect Deere’s top-line to grow by roughly 10% compared with 2020,” said Brian Bernard, sector director at Morningstar.

“We expect Deere will benefit from increased investment from its dealer network over our forecast, resulting in 3% average sales growth from 2021-2025,” Bernard added.

For fiscal 2020, net income attributable to Deere & Company was $2.751 billion, or $8.69 per share, compared with $3.253 billion, or $10.15 per share, in 2019. Worldwide net sales and revenues decreased 2%, to $9.731 billion, for the fourth quarter of 2020 and declined 9%, to $35.540 billion, for the full year.

However, uncertainties regarding supply constraints as well as labour force availability due to the ongoing COVID-19 pandemic could negatively affect the company’s results and financial position in the future.

Deere’s shares closed 1.94% lower at $256.43 on Wednesday amid a weak broader market. However, the stock is down about 50% so far this year.

Net income attributable to Deere & Company for fiscal 2021 is forecast to be in a range of $3.6 billion to $4.0 billion. In the year ahead, Deere expects to benefit from improving conditions in the farm economy and stabilization in construction and forestry markets, according to John C. May. That forecast is higher than the Wall Street estimate of $3.3 billion.

Executive Comments

“Higher crop prices and improved fundamentals are leading to renewed optimism in the agricultural sector and improving demand for farm equipment. At the same time, we are looking forward to realizing the benefits of our smart industrial operating strategy, which is designed to accelerate the delivery of solutions that will drive improved profitability and sustainability in our customers’ operations,” said John C. May, chairman and chief executive officer.

Deere Stores Stock Price Forecast

Ten equity analysts forecast the average price in 12 months at $254.70 with a high forecast of $285.00 and a low forecast of $220.00. The average price target represents a -0.67% decrease from the last price of $256.43. From those ten analysts, four rated “Buy”, five rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $335 with a high of $467 under a bull-case scenario and $134 under the worst-case scenario. The firm currently has an “Overweight” rating on agricultural equipment manufacturer’s stock.

Several other analysts have also upgraded their stock outlook. Deere & Company had its price objective raised by Robert W. Baird to $281 from $250. The brokerage currently has an outperform rating on the industrial products company’s stock. Deutsche Bank raised their price target to $244 from $227 and gave the stock a hold rating. BMO Capital Markets increased their price objective to $235 from $150 and gave the stock an outperform rating.

Analyst Comments

“Deere is one of the highest quality, most defensive names within the broader Machinery universe, given a historically lower cyclicality of Ag Equipment and history of strong management execution. FY21 should mark a tangible acceleration in the NA large ag replacement cycle, as commodity tailwinds are complemented by moderating trade headwinds and improving farmer sentiment,” said Courtney Yakavonis, equity analyst at Morgan Stanley.

“With mgmt continuing to execute against its 15% mid-cycle operating margin target, we see continued momentum in Deere’s margin improvement narrative – representing one of the most attractive idiosyncratic margin improvement narratives in the broader Machinery group,” Yakavonis added.

Upside and Downside Risks

Risks to Upside: 1) Recovery in commodity prices and US cash receipts. 2) Better than expected margin improvement efforts. 3) US infrastructure bills pass, driving outsized C&F growth – highlighted by Morgan Stanley.

Risks to Downside: 1) Commodity prices truncate ongoing replacement cycle. 2) Excess Used inventories limit pricing power and demand pull-through. 3) Mis-execution around 15% operating margin target. 4) Supply chain woes and price/material headwinds persist.

Check out FX Empire’s earnings calendar