We came across a bullish thesis on Deere & Co (DE) on ValueInvestorsClub by madmax989. In this article we will summarize the bulls’ thesis on DE. Deere & Co shares were trading at $378 when this thesis was published, vs. closing price of $409.73 on Sep 18.
A combine harvesting crops, showing the capabilities of the company’s agriculture equipment.
Deere & Company, popularly known as John Deere, is a powerhouse in the agricultural and construction equipment sectors. With a rich history and an iconic green and yellow brand, Deere has established itself as a leader through its commitment to innovation and sustainability. The company generates significant revenue from a wide range of products, including tractors, harvesters, and precision agriculture technologies, which enhance farming efficiency and productivity.
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The agricultural equipment market is projected to grow at an annual rate of 7.3% from 2023 to 2030, potentially reaching nearly $300 billion in value. This growth presents a substantial opportunity for Deere, especially in lower- and middle-income countries, where agricultural practices are evolving rapidly. Furthermore, the trend of farm consolidation is driving larger agricultural operations to invest more heavily in advanced machinery, creating a favorable environment for Deere’s offerings. In Brazil, for example, the sophisticated farming sector is witnessing a 2-3x increase in crop rotation compared to North America, making precision agriculture solutions increasingly appealing. Brazilian farmers, who might spray crops up to 20 times a season, stand to gain significantly from Deere’s advanced technologies.
While recent quarters have indicated a softening outlook due to rising global stocks and fluctuating commodity prices, Deere’s management has proactively adjusted its strategies. By controlling inventory levels and focusing on operational efficiencies, the company aims to navigate these challenges effectively. Despite lowering guidance for 2024 sales, where they anticipate a 15% decline in North American large ag equipment sales, Deere expects to run its production to retail sales in the 92% range, positioning itself for a strong rebound in 2025 with the launch of numerous new products.
Financially, Deere has demonstrated impressive performance. Over the past decade, the company has achieved a compound annual growth rate (CAGR) of 14% in earnings per share, rising from $9.62 in 2013 to $34.85 in 2023. This growth has been supported by consistent gross margins, which have increased from approximately 30-35% in prior cycles to around 40% in the last twelve months. Operating margins have also seen significant improvement, with the company achieving a 25% operating margin recently.
From a valuation perspective, Deere’s current trading multiples offer a compelling investment thesis. As of now, the stock is trading at around $378, reflecting a mid-cycle price-to-earnings (P/E) multiple of approximately 15x based on 2024 estimates. Given that management targets a dividend payout ratio of 25-35% of mid-cycle earnings, this suggests a slightly higher valuation closer to 19x. Historical data indicates that Deere’s mid-cycle multiples have averaged significantly higher than current levels, indicating potential for upward adjustment as the company capitalizes on its technological advancements and market share growth.
Moreover, Wall Street consensus predicts flat revenue in 2025 followed by a recovery with around 4% growth in 2026. Morningstar forecasts around 5% revenue growth from 2026 through 2028. Notably, about half of this expected growth will stem from price realization, which management indicates typically falls in the 2-3% range annually.
In summary, Deere & Company stands at a pivotal point, leveraging innovation, sustainability, and market leadership to drive future growth. With strong fundamentals, an impressive track record of profitability, and an attractive valuation relative to historical standards, investing in DE stock presents a promising opportunity. As the agricultural equipment market continues to expand and evolve, Deere is well-positioned to capitalize on these trends, making it an appealing option for investors looking to engage with a transformative sector.
DE is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 53 hedge fund portfolios held DE at the end of the second quarter which was 51 in the previous quarter. While we acknowledge the potential of DE as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.