Deere & Co. (DE) was a Top Pick for 2023, and recent good news justifies a price target hike, says John Eade, analyst at Argus Research.
Our rating on DE is BUY, and we have liked the company for a while. As a global manufacturing firm, Deere is affected by worldwide 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.
Sales and earnings are benefitting in the current environment from relatively high commodity prices; volumes are picking up. Meanwhile, Deere management has taken steps to reduce costs, and is targeting all-time high margins. A new CEO and CFO have been appointed recently, and both are from Deere’s innovative Precision Ag group.
We see continued solid earnings power in the quarters ahead, as new management innovates to improve products and the company’s customers carry out the essential work of promoting food security. In our view, the shares offer value despite a recent strong performance.
For perspective, DE shares have outperformed over the past quarter, gaining 7% while the S&P 500 has risen 3%. Over the past year, the shares have also outperformed the market with an 11% gain compared to a 9% decline for the S&P 500.
The company recently reported fiscal 1Q23 EPS that rose 124% year-over-year and topped consensus estimates. Revenue increased 32% year-over-year to $12.7 billion. The fiscal 1Q net margin was 15.5%, up from 9.4% a year earlier. Diluted EPS came to $6.55 and topped the Street forecast of $5.56. For the full year, the company earned $23.28 per share. Along with the 1Q results, management raised guidance for FY23.
Our new target price is $485, up from our earlier target of $475, and implying a P/E ratio of 14-times, which is near the midpoint of the historical range. We think that DE shares are a suitable core Industrial holding in diversified portfolios.
Recommended Action: Buy DE.
