The combination of Deere’s (NYSE:DE) conservative guidance and the Phase One U.S.-China trade deal have left DE stock poised to climb in the wake of the company’s fiscal first-quarter results. The farm equipment maker is expected to report its Q1 results on Feb. 21. Meanwhile, Deere’s focus on technology have left it well-positioned to outperform over the long-term.
Conservative Guidance
When Deere reported its Q4 results in November, it lowered its fiscal year 2020 net income guidance to $2.7 billion to $3.1 billion from $3.2 billion previously. Deere also predicted that its global sales of agriculture and turf equipment would sink 5%-10% in FY20. As one reason for the poor guidance, the company cited “lingering trade tensions.”
However, Deere issued the guidance when the successful conclusion of the Phase One U.S.-China trade deal was far from certain. Not only does the deal virtually eliminate uncertainty about future tariff hikes by China on U.S. agricultural products, but — as part of the deal — China agreed to buy a staggering $32 billion of farm products over the next two years.
Moreover, as I’ve noted previously, “on Feb. 7. White House economic adviser Larry Kudlow told Bloomberg that Chinese President Xi Jinping had reaffirmed Beijing’s commitment to make the purchases required by its trade deal with the U.S., despite the coronavirus from China outbreak.” Meanwhile, just this week Reuters reported that China would lower its tariffs on 696 U.S. imports. Examples of these products are pork, beef and soybeans.
Also this week, Bloomberg reported that “China is considering making some purchases of U.S. agricultural goods by early March as a way to show it’s still committed to its “phase one trade deal.”
Not only will farmers have to buy more equipment from Deere in order to grow the food that China will buy, but China’s purchases will boost crop prices. In turn, this will give farmers additional money to buy more of Deere’s equipment.
The Fundamentals Sounded Better Than the Guidance
On Deere’s Q4 earnings conference call held in November, the company sounded relatively upbeat about the company’s fundamentals and the fundamentals of its flagship farm machine business. Specifically, Deere said the company had a “strong finish” to its Q4, while its revenue surged 5% year-over-year (YoY) in Q4.
Deere also reported that its “North American large ag business finished the quarter with strong retail sales, putting us in an excellent inventory position for the start of 2020.” Moreover, it stated that overall supplies of both corn and soybeans had diminished, while U.S. farmers’ net cash income had jumped 7% YoY. Additionally, the company reported that the age of U.S. farm equipment had reached “highest point in over a decade,” likely forcing many farmers to buy new equipment.
Finally, it noted that farmers were making purchases of new, high-tech vehicles in order to increase their profits.
High-Tech Equipment Will Likely Boost DE Stock Over the Longer Term
Speaking of Deere’s high-tech equipment, Melus Research analyst Rob Wertheimer thinks that the company can lift its revenue by $250 billion by “selling new technology and services to farmers.”
In some cases, the company’s new products enable farmers to reduce their use of herbicides by 90%. Not only will such reductions save farmers a great deal of money, but less use of herbicides will make their crops much more appealing to consumers.
As a result, wholesalers will be much more attracted to farmers’ products. The analyst notes, however, that many of the new products to which he’s referring are not yet available to farmers.
The Bottom Line on DE Stock
Since Deere’s guidance likely did not factor in either the increased certainty created by the Phase One trade deal or the coming crop purchases by China, it is probably conservative. And, the company will likely raise its outlook when it reports its Q1 results.
Furthermore, because DE stock has actually declined slightly since the company reported its Q4 results, the shares probably do not factor in such a guidance increase. Meanwhile, the company’s high-tech products will improve its results slightly in the near-term and tremendously in the long-term.
Given all of these points, both shorter-term and longer-term investors should feel comfortable adding DE stock to their portfolios.
As of this writing, Larry Ramer did not own shares of any of the aforementioned companies. Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
