Wall Street Cultivates Even More Bullish Outlook For Deere

Agricultural machinery maker Deere & Company DE reported fiscal third-quarter results that prompted some analysts to turn more positive on the stock.

Deere reported earnings of $2.57 per share, which beat the analyst consensus estimate of $1.26. The company reported third-quarter worldwide net sales and revenues came in at $8.925 billion versus $6.70 billion estimate. The company also raised its fiscal 2020 net income guidance from $1.6 billion to $2 billion to $4.25 billion

BMO analyst Joel Tiss maintains an Outperform rating on Deere with a $235 price target.

Morgan Stanley analyst Courtney Yakavonis maintains an Overweight rating on Deere with a price target lifted from $181 to $247.

BofA Securities analyst Ross Gilardi upgraded Deere from Neutral to Buy with a price target lifted from $194 to $234.

RBC Capital Markets analyst Seth Weber maintains an Outperform rating on Deere with a price target lifted from $180 to $228.

BMO: Key Takeaways

Deere's earnings report is highlighted by confirmation that end-market demand is performing "better than feared," Tiss wrote in a note. Other key takeaways from the earnings release include the adoption of the company's precision-agricultural technology platform is accelerating and now exceeds 25% on new machines, and CEO John May's "aggressive" restructuring program will take time to implement but management kept its 15% operating margin goals unchanged.

Morgan Stanley: Conference Call Highlights

Deere's report marks a "tangible step" towards management's 15% mid-cycle operating margin target despite disruptions from COVID-19, Yakavonis wrote in a note. Management provided further color and commentary on its conference call and some of the more notable highlights include:

  • The retail environment remains strong in North America while planned underproduction positions Deere to produce at retail demand next year. Also, new and used large ag inventories were low and used inventories are at levels that haven't been seen since 2014.
  • North American small ag demand is benefiting from stay at home trends while large ag demand is relatively stable, although still down from last year. U.S. farmer sentiment was described as "fluid" despite trade and government support concerns remaining.
  • Fiscal fourth-quarter margins should see a smaller material price benefit as material prices after material prices became a tailwind in the fourth quarter of 2019.

BofA: The Quarter 'We've Been Waiting For'

Deere reported a beat-and-raise quarter that puts the company on "solid footing" into the new fiscal year, Gilardi wrote in the note. The company is also showing impressive margin performance despite a low point in the grain cycle.

Most notably, Deere delivered a 630 basis point Ag & Turf margin expansion despite a 5% decrease in sales. In fact, Ag & Turf showed its best margin performance since 2013 when corn was $6 per bushel versus $3.25 now.

Meanwhile, the end market is demanding more automation in their machinery and Deere offers a best-in-class product lineup that helps farms increase productivity at every stage of the crop rotation.

The bottom line, Gilardi said the company's precision agriculture leadership and ESG merits should command a sustained multiple expansion moving forward.

RBC: Outlook Commentary

Deere lifted its full-year 2020 net income outlook, partly due to upside in the recent quarter, Weber wrote in a note. FINCO profit for 2020 was lifted from $490 million to $510 million to reflect a provision for credit losses of 37 basis points due to higher uncertainty.

Cash from operations was also increased from $1.9-$2.3 billion to $2.8 billion while R&D and SA&G are expected to be lower by 5% to 7%, respectively.

Price Action: After trading higher in Friday's session, shares of Deere were trading higher by another 3% at $205.86.

Posted In: agricultureBMOBofA SecuritiesCourtney YakavonisJoel TissMorgan StanleyRBC Capital MarketsRoss GilardiSeth WeberAnalyst ColorEarningsLong IdeasNewsGuidanceUpgradesPrice TargetTop StoriesAnalyst RatingsTrading Ideas