Strong Fundamentals Support Deere & Company Growth
Deere & Company (NYSE: DE) continues to perform exceptionally well. The company's rebound is firing on all cylinders and aided by a new focus on technology. The company has built out a digital platform called the John Deere Operations Center and doubled down on precision technologies that are in high demand. The Q3 results and guidance raise suggest that not only will these trends continue but that they are accelerating and yet, for some reason shares are moving lower. The best that we can come up with is that the market was simply expecting more and those expectations were not met. What this means for us today is a discounted entry into a solid dividend payer with growth in its outlook.
John Deere Exceeds Expectations In All Segments
Deere & Company reported a very strong quarter driven by strength in all segments. The company harvested $11.53 billion in net revenue for a gain of 29.1% over last year. The 29.1% gain is versus a soft comp but still a very strong number and one that produces 28% growth in the two-year stack. Sequentially, this is the third quarter of accelerating revenue and a company record. In regards to the analyst and their expectations, the company's fiscal Q3 revenue beat the consensus figure by 1000 basis points.
On a segment basis, all three of the company's major reporting segments saw robust double-digit growth. The equipment segment, which accounts for about 90% of sales, grew 32% while agriculture and small agriculture grew by 29% and 32%. Small agriculture includes things like lawn care items and small-scale farming equipment that have seen sustained high double-digit increases in the wake of the pandemic.
Moving down to the income portion of the report, the company's operating margin in its largest segment expanded to 19% as the company navigates supply chain disruptions. On the bottom line, the GAAP earnings of $5.32 more than doubled from last year and beat the consensus by $0.75.
The revenue and earnings strength led the company to increase its guidance for the year. The company increased its guidance for net income to a range above the previous range and slightly above the consensus estimate. We read this as Q4 revenue and margin are so far better than expected and we are not surprised.
Deere & Company Has A Grade-A Dividend
The Deere & Company dividend is one where you trade yield for safety. At current prices, the stock is yielding about 1% but it's a safe 1% and one with a high expectation for increases. The payout ratio is only 20% of the consensus estimate that we know is far too low and the balance sheet is fortress-like. In our view, investors should expect a dividend Increase or some other form of capital return within the next several quarters if not at the end of the fiscal year.
The Technical Outlook: Deere & Company Falls to support
Shares of Deere & Company fell about 3.5% percent in the wake of the Q3 earnings report. This move is unexpected in light of the earning strength and guidance raise but is ultimately an entry point for new money. Price action is still above firm support at the $340 level but that level might be tested. In the near term, price action may move sideways but longer term, we expect to see Deer & Company resume its up trend and break out to new highs before the end of the year.
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