Deere & Company (DE -0.18%) stock has overcome a few major sell-offs and is now knocking on the door of a new all-time high. While Deere has been a powerful brand and industry leader for decades, a couple of tailwinds are propelling the stock to new heights, and its strategic focus on long-term growth over short-term benefits should prove a recipe for success for decades to come.
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Smashing new records
Deere's fiscal 2023 second-quarter results (released in May) reaffirmed that the company's growth spurt is still very much alive. For the period, which ended April 30, the company notched $2.86 billion in net income and updated its fiscal year net income guidance to a range of $9.25 billion to $9.5 billion, including $10 billion to $10.5 billion in cash flow from equipment operations. Those are jaw-dropping numbers, especially when put into context. With a market cap of around $128 billion, Deere will have a price-to-earnings ratio of just 13.8 if it hits the low end of that guidance.
Over the last three years, Deere's revenue has risen by a total of 68%, its operating income is up nearly threefold, and its net income has more than tripled.
DE Revenue (TTM) data by YCharts.
There's no denying Deere has been in the catbird seat for reasons both within and outside of its control. Like its peers, the company benefited from a boom across the agriculture industry as higher commodity prices boosted farm profits and left operators with enough excess funds to upgrade their fleets with Deere equipment. But Deere has also demonstrated pricing power, which has helped the company offset higher input costs and overcome supply chain headwinds. Deere deserves a lot of credit for making the most of a generally good time for its business.
The snowball effect
Record profits have provided ample income for Deere to invest in its long-term growth. The company's research and development expenses and its capital expenditures have risen at a faster rate than its overall operating expenses -- a sign that Deere is investing in its long-term growth.
DE Total Operating Expenses (TTM) data by YCharts
Deere is experiencing a snowball effect. During downturns in the cycle, Deere focuses on running its existing operations and paying dividends. But the last few years have allowed the company to ramp up big-picture ideas, and buy back stock at prices that in hindsight look like great bargains. This pattern is something that many great companies can do. And it effectively compounds performance over time.
What has made Deere's recent success so pivotal is that it has given the company a massive cushion to invest in some potentially game-changing but risky technologies. Technologies like artificial intelligence (AI) are instrumental in the company's autonomous tractors. The company has also developed tools that farmers can use to save resources like fertilizer and water, boost crop yields at harvest time, plant seeds more effectively, and more.
These solutions and many of the innovations in Deere's pipeline are the fruits of past spending that has positioned the company to be where it is today.
The AI ascension
This brings us to the long-term tailwind for Deere, which is that it has taken AI seriously for years. Deere isn't a company that hopped on the AI bandwagon just because everyone else was doing it. It has been preaching about the next stage of agriculture, which is likely to be far more sophisticated.
As farmland and resources become scarcer in a sustainability-conscious world, environmental stewardship will become paramount. Marrying environmental and economic considerations is the sweet spot that companies in every sector are shooting for. Deere is demonstrating that its solutions can save customers money by using resources better. The environmental side of the equation is straightforward. Use less fuel, materials, and land without compromising crop yield, and you'll get the one-two punch of lower environmental impacts and greater gains.
Play the long game
Deere is a unique industrial stock because it blends a trusted industry-leading brand with compelling long-term growth potential. The company isn't just using the latest buzzwords to get good press. It has been investing in these technologies for a long time. Deere's head start will prove valuable as its competitors scramble to catch up.
Investors should listen closely to Deere's fiscal Q3 earnings call on Aug. 18 to hear management's commentary on its big-picture AI strategy. They'll also get insights into whether Deere is still on track to achieve its ambitious full-year targets.
No matter what happens this quarter, the good news is that Deere is built to be able to reinvest in its business even if growth slows. A manageable dividend, interest expenses, and operating expenses leave the company a lot of room to maintain a hefty R&D budget.
Add it all up, and Deere stock is still worth a serious look even though it's near an all-time high.
