Deere & Company Sell Off Overblown, Outlook Positive
Shares of Deere & Company (NYSE: DE) entered a protracted selloff in the wake of the Q1 earnings report. The market appears to be focused on words like persistent challengers, pandemic, inflation, and margin contraction rather than the company’s outperformance and increased guidance. In our view, the scary words are something to worry about but more of a concern than a threat. While there is some pressure expected in the non-core areas the company actually raised its guidance for margin in the core business.
“Deere’s performance in the first quarter was impressive given production issues surrounding the delayed ratification of our UAW contract in late November as well as persistent challenges posed by the supply chain and pandemic,” said John C. May, chairman, and chief executive officer. “These factors led to higher production costs in the quarter. We continue to work closely with key suppliers to manage the situation, enabling our customers to deliver food production and critical infrastructure.
Three sell-side firms including JPMorgan Chase, Oppenheimer, and Deutsche Bank came out with commentary following the report and they all increased their price target. The new activity puts the Pricetargets.com consensus rating at a weak Buy with a price target of $433. That target implies roughly 30% of upside for the stock and does not include the additional $50 of gains projected by the high target. The consensus is up over the last 12 months, 90 days, and 30-day period and will likely move higher still as the year progresses.
Deere & Compay Beats On Top And Bottom, Raises Guidance
Deere & Company had a good quarter producing $9.75 billion in net sales or 5% growth versus last year and 300 basis points better than expected. The sales were underpinned by a 6% increase in core machinery sales with Big Ag up 9%, Small Ag up 5%, and Construction up 4%. The bad news is in the margin although there is a silver lining. The company’s operating margin contracted by 400 basis points but less than expected and left the GAAP earnings above consensus. The GAAP $2.92 beat the consensus by $0.69 and the company is guiding fiscal 2022 higher. The new guidance is calling for net income in the range of $6.7 to $7.1 billion compared to the previous $6.5 to $7.0 billion range.
Double-Digit Dividend Increases Ahead For Deere & Company
Deere & Company does not increase its dividend on an annual basis like some dividend growth companies but has only ever increased the payout and it is on track to make additional increases as soon as this year. The company is currently yielding about 1.25% and paying out a mere 21% of its consensus for earnings and we know that consensus is too low. The balance sheet is in good shape too, there is a bit of debt but leverage is manageable and coverage high so we aren’t too worried. Trading at only 15X that same consensus the stock offers a value relative to the broad market as well.
The Technical Outlook: Deere & Company Move To Support
Price action in Deere & Company made a hasty retreat but the market did not completely implode. Price action retreated to the bottom of the 12-month trading range where we would expect to see strong support. The price action is already showing signs of that support so we are optimistic the stock is at or near its bottom. In the near term, price action may continue to test support but we would expect to see a bottom form soon and for prices to begin moving sideways. Longer-term, shares of Deere & Company are expected to move up and set new highs by the end of the year.
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