Shares in agricultural and infrastructural equipment maker Deere (DE 0.86%) rose 12.2% in July, according to data provided by S&P Global Market Intelligence. The stock price rise comes as Wall Street analysts and the market shifted toward a more positive sentiment for the company's prospects.
The word "sentiment" is very important when discussing Deere, and not just from the perspective of investors buying the stock. In reality, the company's sales outlook will largely depend on farmers' sentiment toward buying new equipment. Unfortunately, the COVID-19 pandemic has negatively impacted end demand in 2020 and, therefore, sentiment toward buying new agricultural equipment. Similarly, the shutdowns imposed on the global economy have significantly impacted sales in Deere's construction and forestry segment.
All told, on the company's first-quarter earnings call in May, Deere was forced to reduce its estimate for full-year net income from $2.7 billion-$3.1 billion to $1.6 billion-$2 billion.
Clearly, it's going to be a difficult environment in the near term, but there's a growing sense that Deere is over the worst of the news flow, and a few Wall Street analysts raised their price forecasts for the stock in July. In a nutshell, sentiment toward buying new and used farming equipment appears to have improved over the summer. In addition, thinking longer term, Deere still has a number of positive catalysts behind it:
- U.S. farm income is being supported by government aid.
- The phase 1 trade deal with China should support improved sales of U.S. grains and oilseeds.
- Deere has ongoing growth prospects through the adoption of its precision agriculture solutions.
- It's widely believed that the U.S. fleet of agricultural equipment is in need of replacement -- something that should encourage demand when conditions normalize.
Deere is set to give its third-quarter earnings on Aug. 21, and the market will be keenly watching to see if there's any improvement in underlying global conditions. The rise in the stock price in July certainly suggests that Deere may well be over the worst, and if so, it's possible that the company could be set for a multiyear recovery in sales and earnings.
Investors will have to wait and see until the upcoming earnings report is released. If sentiment toward buying farm equipment really has improved, then it's possible that management will upgrade its full-year forecasts. Thus, investors' focus will turn toward Deere's long-term prospects, and that could be good thing for the stock price.