Deere (DE) reported better-than-expected fourth-quarter fiscal results early Wednesday and signaled strong gains in 2023 as well. DE shares rose early Wednesday, signaling to move out of a buy zone.
The big question is what the situation is with the supply recovery. The agricultural and construction equipment manufacturer had sold out large tractors in the third quarter due to a shortage of parts.
Deere, an economic gauge, has benefited from equipment prices pushed to record highs by those shortages, as well as higher crop prices. Those benefits were offset by economic uncertainty and inflationary pressures, as well as supply disruptions.
In addition, both Deere and Caterpillar (CAT) should benefit from US infrastructure spending. DE shares deserve a spot on the prestigious IBD Leaderboard list.
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estimates: Analysts polled by FactSet expected Deere’s earnings for the October quarter to rise 73% to $7.11 per share. Total sales increased 27% to $14.4 billion.
Results: Deere revenues rose 81% to $7.44 per share, a major acceleration from the 16% increase in the quarter ending July. Sales increased 37% to $15.54 billion, the third quarter where sales growth accelerated.
Outlook: Deere expects fiscal 2023 net income of $8 billion – $8.5 billion, above consensus and up from $7.13 billion in fiscal 2022. Analysts see DE earnings per share up 13.5% rising to $25.92 per share.
In August, Deere lowered its full-year profit forecast, saying it is “working closely with our factories and suppliers to meet increased customer demand.” At the same time, CEO John May said: “We believe favorable conditions will continue into 2023 based on the strong response we have experienced to early order programs.”
Shares of Deere are up 5.2% today to 438.31 in the stock market.
DE stock broke past a handle buy point of 406.12 cups on Nov. 8. It closed within the 5% chase zone, which stretches to 426.43, according to analysis of the Leaderboard chart.
The relative strength line for DE stocks hit a new pre-breakout high after rising over the summer.
DE stocks screen very well for major IBD ratings. As of November 22, it earns a perfect composite rating of 99. It also carries an EPS rating of 94 and an RS rating of 92, both of a best possible 99.
CAT shares rose 2.5% on Tuesday to close less than 1% below an entry of 237.90. At the end of October, Caterpillar crushed its third-quarter earnings estimates and sales as well.
Other agricultural stocks to watch are grain processors Archer Daniels Midland (ADM), fertilizer producer CF Industries (CF) and Lindsay (LNN), an irrigation equipment manufacturer that is also taking on a role in the green hydrogen infrastructure space.
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Deere tractors are experiencing a shortage of parts
Tractor manufacturer Deere saw sales grow 22% in the July quarter, driven by strong pricing and demand for large farm equipment. But shortages of chips and other parts led to partially built machines, waiting for parts for workers to complete assembly.
Profitability was squeezed by supply chain challenges, which led to significant manufacturing inefficiencies,” Edward Jones analyst Matt Arnold wrote in a note this summer.
Those inefficiencies are expected to decrease as supply chains normalize. “Demand for Deere products remains very robust and we expect the favorable demand environment to continue given high grain prices and rising infrastructure spending,” Arnold added.
The replacement demand is increasing due to aging machinery. Deere also makes excavators, excavators, dump trucks and wheel loaders for the construction market.
Arnold rates DE stock as a buy.
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