Can The Uptrend Continue for American Equity Investment Life Holding (AEL)?
Deere & Company DE has been witnessing promising growth over the past few quarters, mainly driven by strong order activity, rising replacement demand, and its focus on acquisition and precision agriculture. However, challenges in the agriculture business and elevated expenses remain headwinds.
This Zacks Rank #3 (Hold) company has an estimated long-term earnings growth rate of 5.7%.
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
Factors Favoring Deere
Deere’s shares have outperformed the industry over the past year. The stock has gained around 23%, while the industry recorded growth of 17%.
Positive Earnings Surprise History
Deere outpaced the Zacks Consensus Estimate in two of the last four quarters, with an average beat of 2.06%.
Looking at Deere’s price-to-earnings ratio, shares are underpriced at the current level, which seems to be attractive for investors. The company has a trailing P/E ratio of 17.6, which is below the industry average of 18.2.
Return on Equity (ROE)
Deere’s trailing 12-month ROE of 28.5% reinforces its growth potential. The company’s ROE is higher than the ROE of 27.4% for the industry, highlighting the company’s efficiency in using shareholders’ funds.
Growth Drivers in Place
Deere estimates Agriculture and Turf equipment sales to increase about 14% in fiscal 2018, supported by robust order activity in Combine Early Order Program and order book for large tractors. Notably, industry sales for agricultural equipment in the United States and Canada are estimated to be up about 10% for the fiscal, aided by elevated demand for large equipment. Further, the company noted that agricultural equipment is being buoyed by replacement demand despite tensions over global trade and other geopolitical issues.
Deere's focus on precision agriculture will be a catalyst. The Intelligent Solutions Group (ISG) is the company’s premier development facility specializing in creating technology used in maximizing crop yields and improving food production infrastructure. In collaboration with its product platforms, the ISG facility has been advancing Deere's precision agriculture strategy and leading the industry in machine optimization, job execution and mobile management for farmers. Moreover, the company has been aggressively investing in its portfolio of ISG tools, including precision hardware, telematics, digital solution and advanced customer support.
In addition to the above, Deere has effectively utilized M&A to help execute crop-care strategy, completing four acquisitions over the last three years, including Monosem, Hagie, Mazzotti, and King Agro. In September 2017, the company acquired Blue River Technology which has aided precision agriculture. Following this, it acquired the world’s leading road-construction equipment maker — Wirtgen — in December. The buyout significantly enhances Deere's exposure to global transportation infrastructure. Finally, Deere signed a definitive agreement to acquire PLA in July 2018 which will assist it in providing innovative, cost-effective equipment, technology, and services to customers.
Headwinds for Deere
Deere’s performance will be unfavorably impacted by challenges in the agriculture business. Results of the business will be hurt in fiscal 2018 by expectations of high global grain and oil seed stocks-to-use ratios. Further, the corn stocks-to-use ratio may decline in response to the rising global demand and drought conditions experienced during the first crop in Argentina. Deere will also bear the brunt of elevated expenses in fiscal 2018. The company believes an unfavorable product mix, higher overhead spending and increased incentive compensation will dampen margins.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Stocks to Consider
Some better-ranked stocks in the same sector are Atkore International Group Inc. ATKR, Donaldson Company, Inc. DCI and Lawson Products, Inc. LAWS. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 39% in a year’s time.
Donaldson has a long-term earnings growth rate of 11.5%. Its shares have gained 28%, over the past year.
Lawson Products has a long-term earnings growth rate of 17.5%. The company’s shares have appreciated 24% in a year’s time.
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