Long Term Construction Upswing And Aging Farm Fleets Will Support A Stronger Outlook

Catalysts

About Deere

Deere manufactures equipment and technology for agriculture, construction, forestry and related financial services.

What are the underlying business or industry changes driving this perspective?

• Growing construction activity tied to infrastructure programs, data center buildouts and road building in North America and Europe is supporting stronger order books in Construction & Forestry. This can help drive sustained net sales and operating margin expansion in that segment.
• The need to upgrade aging farm fleets in the U.S., combined with healthier used equipment inventories and stable farmer balance sheets, is starting to support replacement demand for high horsepower tractors and combines. This can underpin revenue and support Production & Precision Ag margins.
• Rising focus on productivity and resource efficiency on job sites is increasing demand for smart machines and connected solutions like Tenna, Virtual Superintendent and John Deere Operations Center. This can deepen recurring revenue opportunities and support earnings quality over time.
• Policy support and interest in biofuels and renewable fuels, along with stable global crop demand, are supporting long term equipment needs in key row crop markets. This can help Deere sustain equipment volumes and support net income even through agricultural cycles.
• Ongoing product launches, such as the new Deere designed excavator line and advanced harvest automation packages with very high attach rates, are increasing technology content per unit. This can support higher average selling prices and contribute to margin resilience and earnings growth.

Assumptions

This narrative explores a more optimistic perspective on Deere compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Deere's revenue will grow by 4.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 10.3% today to 19.3% in 3 years time.
• The bullish analysts expect earnings to reach $10.3 billion (and earnings per share of $39.6) by about February 2029, up from $4.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $5.9 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 26.7x on those 2029 earnings, down from 37.3x today. This future PE is lower than the current PE for the US Machinery industry at 29.4x.
• The bullish analysts expect the number of shares outstanding to decline by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Large agriculture in the U.S. and Canada is still expected to see a 15% to 20% industry decline this year, and Deere is forecasting Production & Precision Ag net sales to be down 5% to 10%. If replacement demand for high horsepower tractors and combines stays muted for longer despite an aging fleet, segment revenue and overall earnings could remain under pressure instead of recovering.
• Producer margins in several regions are described as pressured, with South American tractor and combine sales now projected to be down about 5% and customers in Brazil facing subdued commodity prices, high interest rates and a stronger real. If this cautious backdrop persists or worsens it could weigh on order activity, limit Deere’s pricing power and compress net margins.
• Deere expects to absorb about US$1.2b of tariff costs this year and is only roughly price cost neutral including these expenses. If tariff relief is slower than hoped or new trade measures emerge, additional input cost pressure could outpace future pricing actions and reduce segment operating margins and group net income.
• Construction & Forestry is currently supported by U.S. infrastructure spending, rental re-fleeting and data center related projects, while housing is described as subdued and contractor demand is tied to confidence in multi year backlogs. If project pipelines slow or policy support fades, the segment’s forecast for around 15% net sales growth and 9% to 11% operating margin could prove optimistic and drag on consolidated earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Deere is $793.0, which represents up to two standard deviations above the consensus price target of $630.4. This valuation is based on what can be assumed as the expectations of Deere's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $793.0, and the most bearish reporting a price target of just $458.12.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $53.5 billion, earnings will come to $10.3 billion, and it would be trading on a PE ratio of 26.7x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of $662.49, the analyst price target of $793.0 is 16.5% higher.
  
• 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.