Buy Into the Future of Farming with Deere Stock

If you think of John Deere (NYSE:DE) as “just” an agricultural business, you’ll have a difficult time of making heads or tails on the future direction of the stock. The company reports earnings on August 21 and there’s enough news to make your head spin.

Since the market selloff in March, DE stock is up 72% including a total return of 51% in just the last three months. That performance was significantly better than its sector and more than double the broader markets. But the stock is still drawing mixed reviews. Perhaps that’s a case of mistaken identity.

If you look at Deere as a straight agriculture play, then it may be overbought (but still offers a nice dividend). If you look at it as a sneaky play in areas such as robotics and artificial intelligence (AI), then the stock may be just getting warmed up.

Analysts are giving the stock mixed reviews

As typically happens before an earnings report, the opinions on Deere stock have been coming in fast and furious. And though the majority of opinions are bullish, there are a couple of notably bearish exceptions. On August 13, Deutsche Bank analyst Nicole Deblase downgraded Deere stock to Hold. It had been a Buy. The downgrade, according to Deblase was mainly about valuation. She left her price target of $185 unchanged.

Another analyst, Scott Pope from Morningstar also lowered Deere stock to Sell. He had previously had the stock as a Hold. And while he also left his price target unchanged, it was a lower target to begin with. Pope maintains a price target of $170 for the stock.

And yet a third analyst, Ann Duignan from JP Morgan NYSE: JPM cut her rating to Underweight. For JP Morgan that is the equivalent of Sell. However, she did raise her price target to $160 (from $140). That would still be over 15% lower than the stock’s current price. Duingan’s concern is how Deere will perform as other industrial sectors begin to recover in 2021.

On the other hand, just in the last few days leading into earnings, Deere has received positive reports from five analysts. All five boosted their price targets, and four of the five set the new price target higher than Deere’s current stock price.

Breaking down Deere’s valuation

Deblase is correct in saying that Deere stock is not cheap. But that was true before the pandemic as well. The stock currently trades at a forward price-earnings ratio (P/E) of 21.6. That being said, the company is forecasting earnings to grow to $8.55 per share in fiscal 2021.

That would still be about 20% below the company’s earnings for 2019. It would however be an increase from wherever the number is likely to wind up this year. All of that would seem to argue that maybe Deblase’s analysis is correct.

But this is a different John Deere than just a few years ago. And that’s what looks to be the real catalyst for the stock.

Feeding the world

The world population is expected to climb to 10 billion by 2050. That means farmers around the world will have to grow 50% more food than current levels. The United States and Canada remain John Deere’s largest markets in terms of growth and cash flow. However, the company does have a global footprint with operations in Latin America, Asia, Africa, and the Middle East. And its these regions that look to be the catalysts for top-line growth for the next ten years.

John Deere is rapidly moving beyond traditional agriculture equipment and is now focusing on the precision agriculture market. Automated farm machinery is expected to be an area of growth in coming years. And that is why Deere is being talked about as a play in the areas of robotics and artificial intelligence.

Earlier this year, Deere made news with its plans to use AI to reduce the amount of liquid herbicide used to improve healthy crop growth. But this is only building on where Deere has already been. A list of Deere’s solutions includes construction and agricultural machinery with onboard computers, Internet of Things (IoT) sensors and telematics solutions. Deere is also providing customers with high-quality data and guidance so that they can improve performance and remotely manage equipment. To that end, John Deere has been pushing into data-driven analytical tools and automation including GPS systems, unmanned drones, 4G LTE modems and cloud integration.

It’s a new technological, sustainable view of farming. And John Deere is on the leading edge. If you’re looking at the stock as the low beta stock of years past, you could be missing out on a big opportunity.