Deere & Company Can Set New Highs This Year 

As murky as the outlook for farming and construction equipment is, Deere & Company’s (NYSE: DE) operational quality and capital return have its stock price on track to hit a fresh high soon. The critical details from the Q3 release include top and bottom-line strengths, favorable guidance despite challenging conditions, robust capital return, and a pledge to continue working on costs. 

The takeaway is that Deere & Company’s business contraction is severe but not as bad as expected, and the company is healthy enough to withstand whatever may come while paying its dividend and buying back shares. The odds are high that headwinds will diminish over the next two to three quarters, allowing the company to return to top-line growth in calendar 2025 because the FOMC is expected to cut rates soon.

Deere & Company Results Not As Bad As Feared 

Deere & Company had a decent quarter regarding expectations, but the bar was set low, and the 16.8% decline could have been better. However, the results are 2000 basis points better than the consensus estimate, and relative strength was seen through to the bottom line, allowing the market to advance. Segmentally, Production & Precision Agriculture was weakest with a 25% decline, followed by an 18% contraction in Small Ag & Turf and a 13% contraction in Construction & Forestry. 

Margin is another mixed bag of news, contracting significantly compared to last year as business deleverages but not as bad as feared. Operating expenses fell by 11.5%, lagging the topline contraction by over 500 basis points, to drive a 40% contraction in net earnings. The good news is that the $1.734 billion in net earnings is sufficient to sustain balance sheet health and capital returns, although there is a risk that the pace of share repurchases and distribution increases will slow. 

Guidance is also mixed. The company reiterated its guidance for the year despite the Q3 outperformance, forecasting accelerated declines in all segments. The silver lining is that the cost structure may improve due to aggressive labor force and production reductions enacted to align the business with demand. 

Deere & Company Capital Return is Safe

Deere & Company’s capital return was robust in Q3 and YTD periods. The company’s YTD total buybacks topped $3.337 billion to reduce the share count by over 5.5% on average for the quarter. Repurchase activity has slowed from the prior year but is still expected to continue reducing the count over the next four quarters. The dividend is also safe at less than 25% of the earnings. However, the company’s distribution CAGR is slowing from the mid-teens to the high-single-digits and can be expected to slow again this year in an effort to preserve balance sheet strength. 

Deere & Company’s balance sheet highlights are favorable to investors. The company’s cash balance is down compared to last year but offset by increased assets. Liabilities are also up but less than assets, increasing the equity by nearly 6% and leaving leverage at healthy levels. The company’s total liabilities run at less than 0.8% of assets, with debt at 5.2x cash and 1.85x equity. 

Analysts Lift Targets for Deere & Company After Better-Than-Feared Quarter

Analysts are responding well to the news, lifting their price targets for the stock. The few revisions tracked by MarketBeat have the stock trading in a range of $410 to $445, which brackets the consensus with consensus at the low end of the range. Consensus implies about 13% upside and a fresh, nearly 12-month high, but there are technical limits to how high this industrial stock can go. 

Significant resistance at the $390 and $415 levels will likely induce volatility, if not cap gains, without an additional catalyst. The risk for the market is that economic data will remain stable, inflation will continue cooling slowly, and the FOMC will not cut rates as quickly as hoped. This will leave Deere’s end markets with headwinds, keeping it on track for another year of revenue and earnings contraction, as forecasted by analysts. The next FOMC meeting is in less than four weeks. 

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