Deere (DE) Hits 52-Week High: What's Driving the Rally?

Shares of Deere & Company DE scaled a fresh 52-week high of $209.40 during the Aug 25 trading session, before retracting to close at $205.60. Forecast-topping third-quarter fiscal 2020 results, an improved outlook and strong agricultural equipment demand have contributed to this rally.

The company has a market capitalization of $64.3 billion. Deere has an expected long-term earnings per share growth rate of 7%. The company has a trailing four-quarter average earnings surprise of 36.2%.

Share Price Performance

The stock has gained 18.6% so far this year, outperforming the industry’s growth of 14.9%.

Q3 Earnings & Sales Beat: Deere reported earnings of $2.57 per share in third-quarter fiscal 2020, beating the Zacks Consensus Estimate of $1.30. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) of $7.86 billion also surpassed the Zacks Consensus Estimate of $6.64 billion.

Raised Fiscal 2020 View

Net income for fiscal 2020 is projected at $2.25 billion, up from prior projection of $1.6-$2 billion. Deere expects Agriculture and Turf equipment sales to be down 10% for fiscal 2020. The view slightly improved from the prior forecast of a 10-15% decline. The Construction and Forestry equipment segment’s sales are expected to be down 25% for the fiscal year. Previously, the company expected the segment sales to plunge 30-40%. Stabilization in the agriculture sector as well as the company’s efforts to reduce operating costs have aided the company to raise its outlook. However, management has stated that uncertainties regarding the impact of the COVID-19 pandemic might affect results.

Driving Factors

The U.S. farm sector seems to be showing early signs of stabilization following the passage of The United States Mexico Canada Agreement (USMCA) and the Phase 1 trade agreement with China, which instilled farmer confidence. Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm income is anticipated to improve 3.3% year over year to $96.7 billion in 2020. In inflation-adjusted terms, the projected net farm income in 2020, if realized, would be 5.4% higher than 2000-18 average ($91.7 billion). This will make farmers resume spending on agricultural equipment, which will drive the top line. Moreover, sales for small tractors have been strong as the pandemic has driven an increase in projects for home and property owners.

Deere is assessing the cost structure by reviewing organization efficiency and footprint assessment, which in turn will help improve margins. The company initiated a voluntary separation program during first-quarter fiscal 2020, in sync with its efforts to create a more efficient organization structure and reduce operating costs. These programs will provide an annual run rate savings of around $260 million in fiscal 2020. The company is focused on driving capital-allocation decisions, intensifying investments in precision agriculture, as well as enhancing capabilities in aftermarket and retrofit business.

Deere will benefit from focus on launching products with advanced technologies and features, which provides it a competitive edge. The company remains focused on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process.

As customers’ needs continue to evolve, it will trigger the need to replace old equipment. Their growing reliance on advanced technology to run complex operations smoothly will continue to fuel Deere’s revenues. The company expects replacement demand for aged fleet to support firm equipment volumes in the near term. Moreover, its efforts to expand in precision agriculture will be a game changer. In fact, Deere’s continued investment in precision technologies support customer demand in the current situation.

Solid Estimate Revisions

The company’s earnings estimate for fiscal 2020 is pegged at $6.52 per share and has moved 5% north over the past 30 days. Four analysts have increased their earnings estimates for the current fiscal, while none have revised the estimates downward during the same time frame.

Zacks Rank & Other Stocks to Consider

Deere currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Some other top-ranked stocks in the Industrial Products sector include Silgan Holdings, Inc. SLGN, IIVI Incorporated IIVI and SiteOne Landscape Supply, Inc. SITE. While Silgan and IIVI sport a Zacks Rank #1, SiteOne carries a Zacks Rank of 2 (Buy), currently.

Silgan has a projected earnings growth rate of 28.7% for 2020. The company’s shares have gained 14.7% so far this year.

IIVI has an estimated earnings growth rate of 29% for the ongoing year. The company’s shares have rallied 37% year to date.

SiteOne Landscape has an expected earnings growth rate of 15.4% for the current year. The stock has appreciated 41% year to date.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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