Revolutionising Agriculture With Cutting-Edge Innovation And Decisive Global Expansion

Key Takeaways

• Deere's technological advancements and strategic R&D investments are expected to enhance productivity, drive future sales, and increase customer demand.
  
• Efficient inventory management and focus on high-margin segments are expected to support revenue growth, profitability, and earnings stability.
  
• Continued ag market contraction, declining demand, and economic challenges threaten Deere's revenues, net margins, and earnings due to subdued orders and lower shipment volumes.

Catalysts

Engages in the manufacture and distribution of various equipment worldwide.

• Deere is expected to leverage its recent technological advancements, such as the integration of See & Spray technology, which reduces herbicide use by 60%, and the significant adoption of its advanced features, like automation in harvest settings, increasing productivity by 20%. These innovations aim to enhance customer productivity and are likely to drive future sales, impacting revenue positively.
  
• Efforts to manage inventory, including significant reductions in new and used equipment inventories, are anticipated to position Deere well in maintaining pricing power and improving profitability, directly supporting net margins by reducing excessive discounting or inventory write-downs.
  
• Prospective improvements in geographic and product mix, particularly with increased production anticipated in South America following inventory rightsizing and a stronger market share in Canada from tailored solutions to crop-specific challenges, are expected to support revenue growth and net margin stability.
  
• Deere’s strategic investments in research and development and new market introductions, such as the commitment to autonomous and connected farming technology, are projected to unlock additional value for customers, potentially leading to higher demand and increased revenues.
  
• The structural improvements, including a focus on high-margin product segments and efficient production to match retail demand, underscore the potential for improved margins. This focus is likely to result in higher earnings at trough levels compared to previous cycles.

Deere Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Deere's revenue will decrease by -5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.7% today to 15.1% in 3 years time.
• Analysts expect earnings to reach $6.7 billion (and earnings per share of $26.56) by about November 2027, down from $7.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $7.9 billion in earnings, and the most bearish expecting $6.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.4x on those 2027 earnings, up from 17.8x today. This future PE is lower than the current PE for the US Machinery industry at 25.3x.
• Analysts expect the number of shares outstanding to decline by 2.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.82%, as per the Simply Wall St company report.

Deere Future Earnings Per Share Growth

Risks

• The anticipated continued contraction of ag markets globally, coupled with expected declines in construction and forestry demand, is likely to decrease Deere's revenues.
  
• High interest rates, elevated used inventory levels, and weakened farm fundamentals could lead to subdued early order results, potentially affecting the company’s net margins.
  
• The expectation of lower shipment volumes due to market slowdowns, underproduction, and factory shutdowns may impact earnings negatively.
  
• Currency translation challenges, such as the appreciation of the U.S. dollar against the Brazilian real, could potentially offset profitability gains, affecting overall earnings.
  
• Rising commodity prices coupled with flat year-over-year input costs imply compressed farm net incomes globally, which can pressure equipment demand and thereby impact Deere's overall revenue.

Valuation

• The analysts have a consensus price target of $453.81 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 $538.0, and the most bearish reporting a price target of just $341.21.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $44.2 billion, earnings will come to $6.7 billion, and it would be trading on a PE ratio of 21.4x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $461.04, the analyst's price target of $453.81 is 1.6% 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.