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Deere (DE) Gains From Farm Equipment Demand & Investment

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·4 min read
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On Sep 22, we issued an updated research report on Deere & Company DE. The company will gain from higher agricultural commodity prices that will likely spur agricultural equipment demand in the near term. An improved scenario in the construction sector as well as focus on investments in precision agriculture will continue to aid growth.

Higher Commodity Prices to Drive Growth

According to the USDA’s (U.S Department of Agriculture) farm income forecast, the net farm income is anticipated to increase 19.5% from 2020 to $113 billion in the current year — the highest level since 2013. This upbeat projection is primarily owing to the higher commodity prices on account of the tightening global stocks and strong import demand from China through the year. In inflation-adjusted 2021 dollars, the net farm income is forecast to increase 15.3% in the ongoing year. The increased commodity prices will drive farm income, encouraging farmers to boost spending on the new agricultural equipment and replace their aging fleets. This, in turn, will boost Deere's top line.

The company expects to see solid double-digit growth in production rates for crop care products in fiscal 2022. While government support is expected to decrease this year, total crop cash receipts in the United States will likely be up 19.7% on higher commodity prices, primarily soybean and corn. The U.S customer sentiment has gone up over the last few quarters with elevated exports to China. Considering these factors, Deere projects the fiscal 2021 net income in the band of $5.7-$5.9 billion, up from the prior guidance of $5.3 billion to $5.7 billion.

Upbeat Farm Equipment Sales Forecast Bodes Well

For the Agriculture & Turf segment, the company expects industry sales of large agricultural equipment in the United States and Canada to be up roughly 25% in fiscal 2021, and small agricultural and turf equipment to be up 10%. In Europe, the industry is projected to be up around 10-15% as higher commodity prices favored business conditions in the arable segment. In South America, the industry sales of tractors and combines are likely to go up 20%. Industry sales in Asia are forecast to be up significantly, driven primarily by a strong recovery in the Indian tractor market.

Net sales for Deere’s Production and Precision Agriculture segment are anticipated to be up between 25% and 30% in fiscal 2021. The segment’s operating margin is estimated between 20% and 21%.

The company has also been witnessing improvement in the Construction & Forestry segment. The North American construction equipment industry sales are expected to be up between 15% and 20%, while the sales of compact construction equipment are estimated to be up between 20% and 25%. The Forestry equipment sales are expected to be up 15%, as lumber demand remains robust.

Sales for the Construction & Forestry segment are projected to be up 30% and the operating margin is likely to be 12% to 13% in fiscal 2021. The company is likely to benefit from growth in non-residential investment and a strong order activity from independent rental companies during the fiscal fourth quarter.

Advanced Farming Technology to Spur Growth

Deere is well poised for growth over the long term, backed by steady investments in new products and geographies. Focus on launching innovative products equipped with advanced technologies and features, and investments in precision agriculture provide it a competitive edge. The company envisions to revolutionize agriculture with technology and make farming automated, easy to use and more precise across the production process. Farmers’ growing reliance on advanced technology to run their complex operations smoothly will continue to fuel Deere’s revenues.

Share Price Performance

Deere’s shares have gained 27.3% so far this year, outperforming the industry’s growth of 21.9%.

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Zacks Rank and Other Stocks to Consider

Deere currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other top-ranked stocks in the Industrial Products sector include Encore Wire Corporation WIRE, Alcoa Corporation AA and Lincoln Electric Holdings, Inc. LECO. While Encore Wire and Alcoa sport a Zacks Rank #1, Lincoln Electric carries a Zacks Rank #2, at present.

Encore Wire has a projected earnings growth rate of 332.6% for fiscal 2021. So far this year, the company’s shares have gained 45%.

Alcoa has an estimated earnings growth rate of 573.2% for 2021. The company’s shares have rallied 108%, so far this year.

Lincoln Electric has an expected earnings growth rate of 45.1% for 2021. The stock has appreciated 22%, year to date.


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Alcoa Corp. (AA) : Free Stock Analysis Report

Deere & Company (DE) : Free Stock Analysis Report

Lincoln Electric Holdings, Inc. (LECO) : Free Stock Analysis Report

Encore Wire Corporation (WIRE) : Free Stock Analysis Report

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