Precision Agriculture Adoption In Brazil Will Strengthen Future Prospects

Key Takeaways

• Deere's strategic inventory management and cost reduction initiatives aim to improve sales, margins, and earnings as supply aligns with demand.
  
• Adoption of precision agriculture technology, especially in Brazil, and improved farmer sentiment could drive sales growth and enhance margins.
  
• High interest rates, macro uncertainty, currency headwinds, and increased competition are challenging Deere's revenue, profit margins, and earnings growth.

Catalysts

Engages in the manufacture and distribution of various equipment worldwide.

• Deere is working to reduce high levels of new and used equipment inventories, which should improve sales and net margins as supply aligns with demand and pricing pressure decreases.
  
• The adoption of John Deere's precision agriculture technology and solutions, particularly in Brazil, is expected to drive future sales growth and improve margins due to the higher-value products sold.
  
• Improved farmer sentiment in key markets like Brazil and Europe, driven by better commodity prices and government support, could lead to increased equipment demand, boosting Deere’s revenue.
  
• Deere's ongoing cost management initiatives, including reduction in material and overhead costs, are poised to enhance operating margins and net earnings.
  
• The company’s proactive production management and inventory reductions give it the flexibility to adapt to market changes, potentially stabilizing and increasing revenue and earnings as demand patterns normalize.

Deere Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deere's revenue will decrease by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.0% today to 19.6% in 3 years time.
• Analysts expect earnings to reach $7.9 billion (and earnings per share of $30.62) by about March 2028, up from $6.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $9.5 billion in earnings, and the most bearish expecting $5.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 21.8x today. This future PE is lower than the current PE for the US Machinery industry at 22.1x.
• Analysts expect the number of shares outstanding to decline by 2.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.26%, as per the Simply Wall St company report.

Deere Future Earnings Per Share Growth

Risks

• High interest rates are dampening equipment purchases in North America and other markets, directly impacting Deere's revenues and earnings.
  
• Persistent macro uncertainty and elevated used inventory levels in agriculture and turf markets may constrain order flows, affecting net sales and profit margins.
  
• The strengthening U.S. dollar against foreign currencies is negatively affecting net sales and operating profits, especially in international markets, which could lower revenue and earnings growth.
  
• Increased competition and price pressures in the construction and forestry segments are leading to negative price realization, which could reduce profit margins and earnings.
  
• The risk of tariffs and trade uncertainties, despite being mitigated by Deere's operational footprint, could still impact components sourcing and overall production costs, potentially squeezing net margins.

Valuation

• The analysts have a consensus price target of $492.567 for Deere based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $583.0, and the most bearish reporting a price target of just $400.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $40.2 billion, earnings will come to $7.9 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $499.62, the analyst price target of $492.57 is 1.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.