Deere & Company DE has been witnessing upward revisions for the past 30 days. The Zacks Consensus Estimate has inched up 0.8% to $9.66 for fiscal 2018 and 1% to $11.54 for fiscal 2019. A positive trend in estimate revisions reflects investors’ optimism over the company’s bright prospects.
Deere also outpaced the Zacks Consensus Estimate in three out of the trailing four quarters, delivering a positive average earnings surprise of 4.21%.
However, the agricultural equipment maker, with a market capitalization of approximately $51.5 billion, has been plagued with challenges in its agriculture business and elevated expenses.
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Deere
Shares of the company have outperformed the industry in a year’s time. The stock has gained around 30% compared with 26% growth recorded by the industry during the period.
Return on Assets (ROA)
Deere, currently, has a ROA of nearly 4%, while the industry's ROA is 3.7%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
Return on Equity (ROE)
Deere’s trailing 12-month ROE of 27.7% reinforces its growth potential. The company’s ROE is higher than the ROE of 25.4% for the industry, highlighting the company’s tactical efficiency in using shareholders’ funds.
Growth Drivers in Place
Deere is well poised to gain from the Wirtgen acquisition which significantly enhances the exposure of the former to global transportation infrastructure. Notably, the Wirtgen integration is right on track, with the Deere-Wirtgen team working toward the synergy target of EUR 100 million by 2022. For fiscal 2018, Wirtgen is expected to add $3.2 billion in revenues. Additionally, Deere now projects that Wirtgen will contribute $100 million in operating profit for the fiscal. Deere expects that Wirtgen’s operating margins will be 13-14% beyond fiscal 2018.
Further, Deere’s performance will be driven by global economic growth, including higher housing starts in the United States, and an improved oil and gas sector. Again, economic environment for the construction, forestry and road building industries bodes well, and it continues to spur demand for new and used equipment. As the United States has put a hold on the tariffs on Chinese goods, it will be beneficial for Deere. The company would have been, otherwise, negatively impacted by the slump in domestic demand due to China's retaliatory tariffs and the ban of U.S. agricultural products.
Deere’s agriculture business is feared to be affected in fiscal 2018 by expectations of high global grain and oil seed stocks-to-use ratios. This is because abundant crops have offset demand around the world. Furthermore, corn, soybeans and stock-to-use ratios are expected to decline, in response to the rising global demand and drought conditions in Argentina, which have lowered the country's corn and soybean production by roughly 25% and 33%, respectively.
Moreover, Deere will bear the brunt of elevated expenses in fiscal 2018. Its guidance for cost of sales as a percent of net sales is about 76% for the fiscal, up 1% from the previous guidance. The company believes an unfavorable product mix, elevated overhead spending and increased incentive compensation will escalate the cost of sales guidance.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Zacks Rank & Stocks to Consider
Deere currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same sector are Axon Enterprise, Inc AAXN, Caterpillar Inc. CAT and W.W. Grainger, Inc. GWW. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Axon Enterprise has a long-term earnings growth rate of 25%. The stock has rallied 153% in a year’s time.
Caterpillar has a long-term earnings growth rate of 13.3%. The company’s shares have gained 48% during the past year.
Grainger has a long-term earnings growth rate of 12.1%. Its shares have appreciated 80% over the past year.
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