Deere Goes Boom (Again)!

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Introduction

It's clip to talk astir Deere & Company (NYSE:DE). This Moline, Ill.,-based shaper of agriculture and building instrumentality is not only 1 of my biggest and favourite dividend maturation holdings, but it's besides a cleanable banal to way nan world economy. To beryllium precise, it tells america a batch about:

• The authorities of world agriculture, including demand, supply, and expectations.
• Construction trends.
• Supply concatenation issues - value since nan pandemic deed successful 2020.
• Inflation and pricing power.

My astir caller article was written connected Nov. 23, 2022. The title was Deere Goes Boom! arsenic nan institution had reported blowout net acknowledgment to its expertise to mitigate higher costs and nan roaring agriculture bull market.

Fast guardant a fewer months, and I get to constitute different article pinch different bullish article, arsenic 1Q23 net were thing short of phenomenal. The institution reported a double-beat, issued beardown guidance, and believes that it tin use from some pricing and request tailwinds.

In this article, we'll talk each of this and dive into nan agriculture tailwinds that could propel this banal to $600.

Why Deere Is Doing So Well (The Big Picture)

I bought Deere backmost successful 2020 erstwhile I was moving connected a immense 9-figure agriculture finance for a backstage client. Back then, I besides was starting my dividend maturation portfolio aft I had vanished my studies. The determination to bargain Deere was based connected respective things, including its expertise to make precocious shareholder worth passim business cycles. Unlike cyclical fertilizer companies, Deere is simply a banal pinch a history of precocious dividend maturation and buybacks whenever it has excess free rate flow.

Over nan past 5 years, nan mean yearly compounding dividend maturation was 13.5%. During this period, nan institution bought backmost 8% of its shares.

Data by YCharts

With that said, nan company's uptrend started aft nan 2020 lockdowns.

The institution benefits from (among others);

• The truth that cultivation proviso maturation is highly tight and group to underperform request growth.

Below are 2 quotes from nan OECD's semipermanent agriculture outlook.

The first 1 comments connected request growth:

Global nutrient consumption, which is nan main usage of cultivation commodities, is projected to summation by 1.4% p.a. complete nan adjacent decade and to beryllium chiefly driven by organization growth.

The 2nd 1 comments connected proviso growth:

Over nan adjacent decade, world cultivation accumulation is projected to summation by 1.1% p.a., pinch nan further output to beryllium predominantly produced successful middle- and low-income countries.

What we're dealing pinch is simply a business wherever semipermanent request is expected to outperform proviso maturation by 30 ground points per year.

This requires precocious technologies to make nan astir of each inch of arable onshore we have. That's wherever Deere comes successful arsenic it's nan world leader successful automated agriculture equipment, which includes autonomous tractors, precision instrumentality for illustration planters that tin spray fertilizer connected seeds to debar wasting materials, and overmuch more.

Deere & Company

The image beneath is an illustration of Deere's latest technology, which allows planters to use fertilizer only wherever it is needed. It's a highly blase portion of instrumentality that will let farmers to prevention fertilizer costs. I look guardant to reviews from farmers arsenic we caput toward planting season.

Deere & Company

The 2nd tailwind is related to this.

• Farmers are yet capable to walk again.

Because of subdued proviso maturation and related issues for illustration nan warfare successful Ukraine, surging fertilizer costs, and beardown demand, harvest prices are doing highly well.

As astir readers know, I for illustration to usage maize arsenic a benchmark owed to its value successful agriculture. It's a cardinal constituent successful animal feedstock, nan ground of ethanol, and is highly fertilizer intensive.

CBOT maize utilized to waste and acquisition adjacent to $3.70 per bushel betwixt 2014 and 2021. That changed aft nan pandemic because of nan aforementioned reasons. While maize is highly volatile, it remains astatine elevated levels adjacent to $7.00 per bushel.

TradingView (CBOT Corn)

This is awesome news for workplace income. While workplace assemblage income is expected to autumn successful 2023 aft 2 years of beardown growth, nett workplace income remains astatine elevated levels, allowing farmers to switch aged instrumentality aft aggregate years of debased prices.

USDA

Moreover, nan timing could not beryllium better, arsenic caller products from Deere and its peers are incentives for farmers to switch aged equipment. The different day, a husbandman from Illinois told maine he was redeeming a tremendous magnitude of money by buying precision-spraying instrumentality from Deere. Moreover, farmers are buying larger combines to amended suit their needs.

Reason 3 incorporates a caller aspect: Supply chains.

• Supply concatenation problems are easing

As we'll talk successful this article, proviso concatenation issues are fading - yet acold from gone. Using nan New York Fed Global Supply Chain Pressure Index arsenic an example, we spot that bottlenecks person eased significantly. However, we're still acold supra levels that bespeak patient proviso chains.

The little this floor plan goes, nan easier it becomes for Deere to amended margins. Especially successful 2022, a batch of companies were incapable to mitigate proviso chain-related issues. Deere succeeded acknowledgment to sky-high customer demand.

Leo Nelissen (Raw Data: New York Federal Reserve)

In its 2022 fiscal year, nan institution boosted operating income by 19% to $9.9 billion. Operating margins roseate from 18.0% to 18.8%. That was a large deal. Can you ideate what operating income would person looked for illustration without proviso concatenation issues? If I'm right, we'll fig that retired successful 2023 and beyond.

With each of this being said, let's dive into nan company's results and comments.

Everything You Need To Know About 1Q23 & More

Prior to earnings, a news post by Seeking Alpha reminded america really fortunate Deere investors had been successful nan past 4 quarters arsenic nan institution had beaten net successful each azygous quarter.

The institution continued this triumph streak. In 1Q23, nan world's largest tractor institution generated $12.7 cardinal successful revenue, which is 32.3% higher compared to nan prior-year quarter. It besides was $1.51 cardinal higher than expected, which is genuinely impressive.

It allowed nan institution to do $6.55 cardinal successful GAAP EPS, which hit estimates by $1.08. This is 1 of nan biggest thumps successful years.

Seeking Alpha

According to CEO John C. May:

Deere's first-quarter capacity is simply a reflection of favorable marketplace fundamentals and patient request for our instrumentality arsenic good arsenic coagulated execution connected nan portion of our employees, dealers, and suppliers to get products to our customers. We are, astatine nan aforesaid time, benefiting from an improved operating environment, which is contributing to higher levels of production.

With that said, nan floor plan beneath shows nan halfway of nan company's success. You're looking astatine a breakdown of nan company's accumulation and precision agriculture segment. This conception covers its ample machinery for corn, soybeans, mini grains, cotton, and related. This conception unsocial accounts for 41% of full nett revenues.

What we're looking astatine is simply a mind-blowing income surge of 55% to $5.2 billion. This was nan consequence of overmuch higher value realization (strong pricing power) and higher shipments. Volume unsocial accounted for a surge of much than $600 million, which confirms underlying request strength. Volumes and pricing added $1.4 cardinal to operating income. Higher accumulation and trading costs accounted for little than $400 million. This allowed nan institution to move 55% gross maturation into 308% higher operating income.

Deere & Company (Author Annotations)

In mini agriculture and turf, nan institution saw a 14% income surge, boosted by tremendous pricing gains. These gains much than offset higher accumulation costs, pushing operating income from $371 cardinal to $447 million.

Deere & Company

What's important to statement is that nan institution expects spot to continue. Not only that, but nan institution expects request to outpace nan industry's expertise to nutrient equipment. Note that nan institution is mentioning nan aforesaid factors we discussed successful nan first portion of nan article: beardown ag fundamentals, precocious fleet age, and debased inventories.

We expect manufacture income of ample ag instrumentality successful U.S. and Canada to beryllium up astir 5% to 10%, reflecting different twelvemonth of demand. The dynamics of beardown ag fundamentals, precocious fleet property and debased section inventory each remain. We expect request to transcend nan industry's expertise to nutrient for yet different year.

While nan institution isn't eager to remark connected nan magnitude of this agriculture cycle, it expects to participate 2024 pinch akin factors for illustration a precocious fleet property and tight inventories.

Moreover:

• The institution expects astir 20% full-year income maturation successful its accumulation and precision ag conception pinch operating margins rising from 19.9% to astatine slightest 23.5%.
• Small agriculture and turf income are expected to beryllium level to up 5%. Operating margins are seen rising from 14.6% to location successful nan 14.5%-15.5% range.

It besides needs to beryllium said that nan institution continues to do amended than nan manufacture successful nan segments that matter astir (large tractors and combines). In each of these segments (I highlighted them successful nan descent below) nan institution reported outperforming growth.

Deere & Company (Author Annotations)

But wait, there's more, particularly concerning proviso chains.

Deere reported that their trader inventories stay beneath historical levels owed to nan precocious request for their products that outpaces their supply. They acknowledged that their bid books are still connected an allocation ground owed to nan vulnerable quality of their proviso chain, contempt immoderate easing of nan proviso challenges. Deere is presently experiencing higher-than-normal proviso disruptions, and they are moving intimately pinch their proviso concatenation to guarantee timely transportation to their customers. This is precisely what nan proviso concatenation parameter I showed successful nan first portion of this article displayed arsenic well.

In addition, owed to nan tight inventory of caller equipment, their dealers are seeing a surge successful request for utilized equipment. They reported that their dealers are quickly trading their utilized equipment, which demonstrates nan resilient request for utilized equipment. As a result, nan inventory levels of utilized instrumentality are low, and nan prices of utilized instrumentality stay strong.

In building and forestry, nan institution saw akin results arsenic it benefited from higher volumes, very beardown pricing gains, and higher accumulation costs, which were not capable to support margins from rising.

Deere & Company

On a full-year basis, nan institution expects income successful this conception to turn betwixt 10% and 15%. Despite precocious recession chances and a anemic lodging market, nan institution cites beardown tailwinds.

While lodging has softened, infrastructure, nan lipid and state assemblage and robust CapEx programs from nan independent rental companies person continued to support demand. Retail income person remained robust and trader inventory is good beneath historical levels. Global roadworthy building markets are forecast to beryllium flat. North America remains nan strongest market, compensating for softness successful Europe arsenic good arsenic successful parts of Asia. In forestry, we estimate nan manufacture will beryllium level arsenic softening successful nan U.S. and Canada is offset pinch spot successful Europe.

With respect to nan full-year outlook, nan institution expects to do betwixt $8.75 and $9.25 cardinal successful nett income. This is up from anterior expectations of $8.0 to $8.5 billion.

Deere & Company

So, what astir nan valuation?

Valuation

Deere is trading astatine 13.5x 2024E EBITDA of $12.4 billion, which is based connected its $128.5 cardinal marketplace cap, $36.2 cardinal successful nett debt, and $2.5 cardinal successful pension-related liabilities. I judge that nan company's EBITDA will travel successful overmuch higher, but for now, I'm utilizing statement numbers. The institution has an A2 in installments rating.

I judge that this valuation is very fair.

Data by YCharts

I besides reiterate my longer-term targets, which I discussed successful my anterior article.

[...] I instrumentality to my semipermanent value targets. I judge that Deere should beryllium trading astatine a marketplace headdress of $182 billion. For now, that's my 2024 (year-end) target.

However, I dream for a 10%-15% banal value pullback earlier I adhd to my position. That's based connected elevated wide economical risks and nan truth that I ne'er bargain stocks during a rally.

Especially nan past portion of nan quote supra is important to me, arsenic I'm not inclined to prosecute marketplace rallies. Moreover, considering my stance connected nan banal market, I expect that location will beryllium further chances to acquisition shares astatine a little value earlier nan banal surpasses nan $500 threshold.

FINVIZ

With each of this said, here's my takeaway.

Takeaway

Deere's caller net study showed awesome results, pinch precocious gross and net per stock figures, and beardown guidance based connected a actual outlook. The institution is expected to proceed benefiting from respective factors, including precocious workplace income, a faster replacement cycle, debased unit inventories, beardown pricing, proviso concatenation improvements, and agriculture fundamentals pointing to sustained request growth.

In addition, Deere's precocious products, peculiarly successful nan high-horsepower segment, person contributed to an summation successful marketplace share. The institution is successful a bully position, and its banal remains attractively valued. Considering each these factors, nan writer believes that Deere is simply a bully bargain moreover during impermanent value drops, pinch a semipermanent value target of $600 per share.

Do you deliberation I'm excessively bullish? Not bullish enough? Let maine cognize successful nan comments!

I'm a Buy-Side Macro Expert/Financial Markets Analyst. On Seeking Alpha, I talk a wide scope of topics including semipermanent dividend (growth) investments, mid-term trading opportunities, commodities, rates, and related. A large portion of my accuracy is to incorporated arsenic overmuch macro arsenic imaginable successful my articles arsenic it helps investors to make their ain decisions and to beryllium connected apical of each awesome developments. My DMs are ever open. Also, I'm connected Twitter (@Growth_Value_) successful lawsuit you want to opportunity hi! Long-Term Dividend HoldingsPSA, DUK, HD, PEP, RTX, UNP, VLO, DE, ABBV, CAT, HBAN, NSC, LHX, XOM, CVX, CP, LMT, NOC, CME, DHR, EXR