Deere: High Tech Meets Agriculture

08/31/2020 5:00 am EST

Focus: INDUSTRIALS

Jason Clark

Contributing Editor, The Prudent Speculator

Deere & Co. (DE), the agricultural, farm and construction machinery firm, has released its fiscal Q3 2020 financial results. The firm earned an impressive $2.57 per share versus the $1.24 estimate, on sales of $7.9 billion (vs. $6.7 billion), reports Jason Clark, contributing editor to The Prudent Speculator.

Cost controls taken early on in the pandemic have proven beneficial, while the firm has announced broad employee-separation programs that will be completed during the fourth quarter that are expected to save an additional $175 million per year.

Management increased its net income forecast to $2.25 billion, but remains tempered in the outlook, expecting sizable sales declines in Ag & Turf (64% of sales) and Construction & Forestry (25% of sales), given economic uncertainty and a desire to reduce inventory levels.

We continue to remain quite optimistic about the long-term potential of global agriculture in general. Deere boasts a tremendous brand backed by product durability and integration with customers that offer efficient farming through real-time diagnostics.

President of Ag & Turf Cory Reed detailed Deere’s efforts on the technology front. “For nearly 25 years, we’ve been investing in core technologies that can be leveraged across the enterprise, from our early development of embedded controllers, software and telematics and guidance systems to more recent investments in computer vision, machine learning and data platforms."

The near term for agriculture continues to be complicated by the three Ps (pandemic, politics and production), particularly as issues around global trade and continued government support remain unresolved.

However, longer term, we view the replacement cycle and precision ag as highly supportive with technology advancements continuing to support and drive pricing.

Further, we think demand will continue to increase as worldwide arable land and population growth should force farmers to be more productive and should continue to drive the need for more efficient farming.

We also like that Deere has the diversifier of its construction products, and think the company will benefit from continued emerging market urbanization. Our target price on DE is now $208.

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