Deere & Company (DE -0.07%) just reported fiscal 2022 third-quarter (ended July 31) numbers that struck a similar tone to those of other industrial companies this year. Higher costs, supply chain issues, and decreased guidance are themes that have been common throughout the first and second quarters of 2022. This sort of earnings reporting is a big part of why the Dow Jones Industrial Average (DJIA) is down about 9.3% for the year.
Deere's stock, however, is up 11.7% over the same timeframe, bucking the trend and outperforming the index. Here's why the stock could continue to outperform going forward.
High crop prices in 2022 helped Deere
Like most other commodities this year, crop prices are elevated. Corn and soybean prices are well above what they were in 2020 and 2021. Though farmers face the same inflationary costs as anyone else this year, higher crop prices (and the added revenue they generate) have allowed more farmers to update their fleets. Deere pointed out in its third-quarter earnings report that sales and profit from large farm equipment were up 43% year over year.
Image source: Getty Images.
Though management modestly reduced its full-year earnings guidance from between $7 billion and $7.4 billion to between $7 billion and $7.2 billion, it's still an admirable increase from the $6 billion it earned in 2021. This year's bumper profit could be why the stock has outperformed the DJIA this year. Crop prices will undoubtedly bounce around each year as they always do. As long-term investors, the focus is on how the company can perform after this year's harvest. Deere has long-term trends going in its favor also.
Deere benefits from domination in top markets
Deere's easily recognizable green and yellow tractors and combines are primarily sold in North America, where the farm equipment manufacturer has built a powerful brand based on a long history of reliability and quality. That has helped the company generate plenty of loyalty among its U.S. customers.
Though Deere's largest market is North America, in 2021, the company sold more farm equipment than any other company on the globe by a wide margin. Deere's position of strength will come in handy in a global agricultural equipment industry that is forecast to grow 8.5% annually through 2030.
Infrastructure spending should help Deere
Beyond farm equipment, Deere also makes construction equipment, including bulldozers and excavators predominantly used in road building. The bipartisan Infrastructure Investment and Jobs Act passed this year will provide $110 billion to help fund road repairs and other transformational projects over the next five years. On the third-quarter earnings call, Deere management told investors that, despite weakness in some foreign markets, its U.S. roadbuilding is being helped by the oil and gas industry, and U.S. infrastructure is beginning to ramp up.
Sustainable outperformance
Deere is well positioned to take advantage of short- and long-term catalysts that could help it continue to outperform the DJIA. In addition to its market-related advantages, Deere will introduce its fully autonomous tractors later this year. The tractors come with six pairs of cameras that allow them to operate within less than an inch of accuracy and can be configured and monitored from a mobile phone. The new technology could fuel another leg of growth for Deere in the coming years. Any active investors looking for long-term outperformance should have their sights set on Deere & Company stock.
