Why You Should Consider Buying The Dip In Deere

Despite posting significant earnings beats Friday, Deere & Company DE fell as much as 9 percent and hardly recovered a quarter of its losses by Monday close.

Still, analysts were largely undeterred. Both Argus and BMO Capital Markets maintained Buy ratings on the stock Tuesday with price targets suggesting 20- to 28-percent upside.

“We believe Deere is a completely new company, one that is more diversified and less cyclical than ever before,” BMO analyst Joel Tiss wrote in a note.

Road To Recovery

Deere’s status as a global manufacturing company renders it reactive to trends in currency and commodity prices, and Argus considers it notable that Deere is still recovering even as the corresponding categories return from inflection points.

BMO Capital thinks Deere’s recovery is just beginning. By its analysis, technological advancements and increasing hours on machines could together drive agricultural equipment sales.

The assessment is bolstered by Deere’s proven ability to produce in line with retail demand, which has justified annual price increases and channel tightening. “The outcome is an even-stronger brand,” Tiss wrote.

The Numbers Speak

At the same time, Argus considers margins near all-time lows and expects a rebound in the next two or three years.

“We have been impressed with Deere’s free cash flow and effective allocation of capital — its diluted shares have fallen 35 percent since 2004,” Tiss wrote. “In addition, the company has been able to create more resilient earnings, strengthen the company’s balance sheet, and increase ROIC from peak to peak.”

While the company might need to borrow a minimal amount for its acquisition of Wirtgen, which is expected to be neither dilutive in the first year nor accretive before the second, BMO projects the purchase to prompt periodic increases in its estimates.

Argus issued a $140 price target and BMO Capital $150. Deere opened Tuesday at $116.93.

Related Link: NAFTA Round One: Gordon Johnson Weighs In On Free Trade’s Effects On Steel, Manufacturing