Deere Earnings: Ag Demand Remains Consistent, While Construction Shows Great Promise

Deere DE reported strong fiscal third-quarter results, as ag demand continues to run strong. Construction is also shaping up to be a strong contributor to earnings growth in 2023. After taking stock of the quarter, we raised our fair value estimate by $2 to $379. We tweaked our near-term sales and margin expectations after management raised its 2023 guidance. That said, the stock was down nearly 5% in intraday trading. We believe the market may be starting to think the ag cycle is getting close to peaking. We don’t disagree with this sentiment, but there’s still room for sales and earnings growth if we take into consideration the replacement cycle of ag equipment, especially in large ag.

On that point, management continues to say average fleet ages are elevated compared with previous cycles. This means fleets are aging faster than ag manufacturers can produce new equipment. Recall, the industry has been held back by supply constraints over the past couple of years. That said, the supply environment continues to improve, giving Deere the ability to increasingly refresh aging equipment for farmers. Farm income has come down in 2023, but it’s still relatively high when comparing with historical figures. This dynamic gives farmers cover to pay for new equipment. In addition, crop supplies continue to be constrained, providing support for farmers to plant more crops in the coming year. All in all, the same themes we’ve highlighted in recent quarters remain, meaning Deere will likely see solid demand for its products at least through the first half of 2024.

On valuation, we remain cautious. Our $379 fair value implies the stock is roughly 5% overvalued currently. We’re taking a measured approach to our long-term forecast. While we think 2023 will be another strong year for Deere, we’ve elected to moderate our sales and margin estimates heading into the midcycle.