Deere (DE -0.14%) stock continues to outperform the industrial sector and the broader indices. In fact, Deere's year-to-date performance turned positive on Monday despite the S&P 500 and the Nasdaq Composite still languishing in a bear market.
When the company reported its third-quarter fiscal 2022 results in late August, it also lowered its full-year net-income guidance from a prior range of $7 billion to $7.4 billion to a new range of $7 billion to $7.2 billion. But positive customer demand in its end markets could spill over into 2023, casting an optimistic outlook for the farm and heavy construction machinery company.
Here are three reasons why Deere is putting up record results during a business environment in which so many companies are failing to counteract inflation.
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1. Industry growth
Deere is a cyclical company whose results tend to ebb and flow to the tune of the broader economy. Although primarily driven by North and South America, Deere does have a large presence in Europe and Asia as well. Deere does best when the global economy is in growth mode, whether through new agricultural equipment investment, construction industries like residential and commercial real estate, infrastructure spending and road building, or forestry development to meet growing timber demand.
Before 2021, Deere's all-time high net-income year was 2013 when the company booked a profit of $3.54 billion. Net income fell yearly between 2014 and 2016 before resuming an uptrend in 2017. However, the COVID-19 pandemic threw a wrench in that growth and resulted in a collapse in capital spending in Deere's end markets. That all changed in 2021 and has continued into 2022.
Like the boom in oil and gas, a simple reason for Deere's success is that its core industries are doing well thanks to generally strong economies and high commodity prices. Although U.S. wheat, soy, corn, and grain prices received have come down off their highs, they are still close to 10-year highs and have been up over 75% in the last three years.
US Soybean Farm Price Received data by YCharts
2. Market-leading position
Despite the strong tailwinds, data reported by the Association of Equipment Manufactures and featured in Deere's Q3 investor presentation suggests mixed results for retail sales and inventories. Rolling three-month retail sales in July 2022 for U.S. and Canadian agriculture slowed for low-horsepower, two-wheel drive (2WD) tractors but rose double digits for high-horsepower 2WD tractors and rose slightly for four-wheel drive (4WD) tractors and combines. However, Deere was able to generally outperform industry trends thanks to prioritizing lowering its partially completed inventory and getting products into customers' hands.
Deere noted on its Q3 fiscal 2022 conference call that it incurred expedited shipping and freight costs as well as higher input costs as it ramped production and focused on sales and market-share growth. However, the move looks like a good one long term in that customers can count on Deere and its dealers to have products in stock when they need them most when so much of the industry is struggling to procure parts and hold onto talent in a tight labor market.
3. Pricing power
Deere's ability to lean into healthy consumer demand by increasing production even with higher costs has been a net positive for the company. Deere forecasts a full-year 2022 price realization of 14% for production and precision agriculture, 9% for small agriculture and turf, and 10% for construction and forestry. Higher unit sales combined with price increases are a one-two punch for offsetting inflation. Deere has proved once again that its product portfolio has incredible pricing power, which should help it even as the business cycle turns.
Deere did note during its Q3 conference call that it is trying to make its business and its cash flows more resilient to changes in the business cycle. In the meantime, dealer inventories are relatively low because Deere sells a high percentage of the products it produces.
Fiscal 2022 orders are full, and first-half fiscal 2023 order books are already full in certain product categories as Deere plans to keep its production high to satisfy demand. Deere believes that its customer fleets are still older than average levels, indicating demand for new equipment and machinery could remain high in fiscal 2023.
Deere is a long-term winner
The million-dollar question for cyclical industries is knowing when the cycle will turn from boom to bust. However, long-term investors care less about timing a cycle and more about choosing companies that can outperform their peers during good times and bad, command pricing power, and grow their business over time. In this vein, Deere continues to be one of the best industrial companies to buy. Throw in a reasonable valuation with a roughly 16 forward price-to-earnings ratio and a 1.2% dividend yield, and you have an industry-leading company at the top of its game that can add stability to a diversified portfolio.
