As a global manufacturing company, Deere (DE) is affected by trends in trade policies, exchange rates and commodity prices. However, Deere management understands, and does a good job of managing the factors it can control, such as pricing and costs, notes John Eade, President of Argus Research.
Prior to the pandemic, results had been on an upswing, driven by a rebound in global demand, an accretive acquisition, and management’s focus on expense control.
Demand for Deere’s Forestry and Construction equipment slumped sharply due to the coronavirus, and earnings declined in FY20.
Deere management took additional steps to reduce costs, and earnings are back in growth mode. A new CEO and CFO have been appointed in recent months, and both are from Deere’s innovative Precision Ag group.
We see continued solid earnings power in the quarters ahead, as new management takes steps to boost margins and the company’s customers carry out the essential work of promoting food security.
The company recently reported fiscal 1Q20 EPS that more than doubled year-over-year and topped the Street estimate. Revenue rose 23% year-over-year (compared to a 2% decline last quarter), to $9.1 billion. Non-GAAP diluted EPS rose to $3.87 from $1.63 a year earlier and topped the Street forecast of $2.16.
Along with 1Q results, management raised guidance for FY21. It now expects net income of $4.6-$5.0 billion, up from its prior forecast of $3.6-$4.0 billion, and compared to $2.8 billion in FY20 and $3.2 billion in FY19.
Based on current sales and margin trends, as well as management’s forecasts, we are raising our FY21 EPS estimate to $15.50 from $11.95. Our estimate implies approximately 75% growth this year and is in line with the high end management’s net income guidance.
We look for continued growth in FY22 and are boosting our preliminary EPS estimate from $13.15 to $17.00. Our long-term earnings growth rate forecast is 9%.
DE shares have outperformed over the past quarter, gaining 30% while the S&P 500 has risen 9%. Over the past year, the shares have also outperformed, with an increase of 88% while the broad market has gained 17%.
We think that DE shares are attractively valued at current prices near $336, near the high end of the 52-week range of $106-$338. From a technical perspective, prior to the pandemic, DE shares had been in a long-term bullish trend of higher highs and higher lows since January 2016. That positive pattern has re-emerged.
On a fundamental basis, the shares appear favorably valued by historical standards and relative to peers. The shares are trading at 20-times our FY22 EPS estimate, compared to a 20-year historical average range of 10-24.
Compared to the Industrial peer group, DE shares trade at below-average P/E and above-average price/sales ratios. We see a return to solid earnings power in the quarters ahead, as management takes steps to boost margins. In our view, the shares continue to offer value. Our revised price target is $380.