Deere (DE 0.41%) is one of the largest and best-known U.S.-based industrial and agriculture companies. The equipment manufacturer is set to report its fourth-quarter (ending Oct. 31) and full-year fiscal 2022 results in late November. For the third quarter of fiscal 2022 (ended July 31), Deere's revenue came in at $13 billion versus $12.95 billion expected, and adjusted earnings per share came in at $6.16 versus $6.65 expected. Deere needs a record quarter in the fourth quarter to hit its full-year 2022 net income guidance of $7 billion to $7.2 billion. 

A record year for Deere in fiscal 2022 would be impressive considering the slowdown across many sectors of the economy. However, the bigger question is whether Deere can sustain its momentum heading into fiscal 2023. Let's break down where Deere stands and where the company could be headed from here. 

A farmer repairs a piece of farm equipment in an open field.

Image source: Getty Images.

Understanding the nuances of the economy

If you followed the last earnings season, chances are you're aware of declines in consumer spending, especially on discretionary goods. Target and Walmart have implemented steep discounts to try and move existing inventory out and make way for the fall and the holiday season. Even consumer staples titan Procter & Gamble -- which traditionally has strong pricing power -- is experiencing declines in growth and weaker margins.

Deere's performance is a reminder that consumer spending and industrial, agricultural, construction, and forestry spending are not the same. And in today's circumstances, the retail and industrial economies are performing in completely different ways. While the consumer may feel the effects of higher inflation, Deere's customers are benefiting from higher commodity prices and near-10-year highs in U.S. wheat, soy, corn, and grain prices. Deere's customers are experiencing multiyear growth after a pandemic-induced decline -- making now a good time to invest in new equipment and machinery. Strong performance in oil and gas and support for infrastructure spending also bodes well for Deere. And while Deere's construction business will deteriorate if the real estate market weakens, it has plenty of levers to pull in other segments to sustain growth.

Putting a record year into context

Even though Deere's stock price is down over 20% from its all-time high, the stock has crushed the broader industrial sector and the S&P 500 over the last one, three, five, and 10 years.

DE Total Return Level Chart

DE Total Return Level data by YCharts

Looking at the 10-year chart, you'll notice that Deere was actually underperforming the S&P 500 when its earnings we falling between 2014 and 2016, only to begin drastically outperforming the S&P 500 and the industrial sector as represented by the Industrial Select Sector SPDR ETF over the last two to three years.

Impressive profitability

Deere's red-hot outperformance in the last few years isn't just a sector-wide growth story. Rather, it's a testament to Deere's pricing power and margin expansion across a diversified portfolio that touches multiple industries and geographies.

My favorite Deere chart shows the company's 10-year trailing-12-month operating margin overlaid with its trailing-12-month revenue.

DE Operating Margin (TTM) Chart

DE Operating Margin (TTM) data by YCharts

You'll notice that Deere's sales and operating margin peaked in 2013 before declining between 2014 and 2016, were trending up before the pandemic began, suffered a hiccup in 2020, and have since been off to the races. Many of Deere's peers enjoyed impressive revenue growth and record sales. But few are boosting margins and growing sales at the pace Deere is, let alone sporting a 16% operating margin.

DE Operating Margin (TTM) Chart

DE Operating Margin (TTM) data by YCharts

In the above chart, you'll notice that Deere currently sports a higher operating margin than peers Caterpillar, Cummins, CNH Industrial, Komatsu, and Kubota. Not only that, Deere's trailing-12-month operating margin is the highest operating margin out of these six companies over the last decade.

A well-rounded investment opportunity

Deere is outperforming its peers in almost every category, which is a testament to its market position. It also validates why the company is able to invest aggressively for multidecade growth even in a challenging business environment.

Deere has successfully offset higher input costs with greater production and deliveries paired with price increases, which have resulted in a higher operating margin in an inflationary environment.

With just a 1.3% dividend yield, there's no denying that Deere sports a much lower yield than many companies in its peer group. However, Deere makes up for that shortfall with higher margins and faster growth. Quality dividend stocks can get away with low yields if the company has a track record for allocating capital effectively. Deere falls into that category and is, therefore, the perfect agriculture dividend stock for folks willing to sacrifice a bit of yield.

Investors looking for a company that can continue performing in a high-inflation environment at a reasonable valuation -- with a dividend to boot -- should look no further than Deere stock.