Deere Earnings: Strong Demand and Improving Supply Chains Lead Management To Raise Guidance

Deere DE reported strong earnings to close out its fiscal second quarter. After adjusting our near-term sales and margin forecast, we raised our fair value estimate to $377 from $369 previously. So far, 2023 is shaping up to be another strong year for the ag leader. Through the first two quarters, equipment sales have increased by nearly 32% on average, running at a similar level to how Deere closed fiscal 2022. There are a couple of factors driving the company’s strong performance. First, the company has benefited from strong price realization. Most of the price increases have been a result of cost inflation, but the company continues to call out that new technology features will be a key driver to pricing in the future. Deere’s strong brand and competitive positioning leads to pricing power, in our view.

We maintain our view that ag markets will remain strong through 2023. Fleet ages continue to run at higher levels. Many farmers will be pushed to refresh their machinery in the near term. The replacement cycle has been underway for a couple of years now, but we see no signs of it letting up this year. Management even noted the company is producing 20%-25% below average production volumes during previous replacement cycles. This shows there’s upside to the current cycle. In addition, farmer income remains at strong levels, giving them an opportunity to replace aging equipment while demand remains strong. Crop inventories remain tight, meaning demand for farmers’ crops will be strong in 2023.

In terms of valuation, we continue to view Deere’s shares as fairly valued. The company’s stock is trading roughly 4% below our $377 fair value estimate. Our forecast already accounts for strong sales and margin performance in the near term. We’d like to see a greater margin of safety before getting excited about valuation.