Farm equipment maker Deere (DE) is forming a flat base on the strength of rising profits and government infrastructure spending. John Deere stock is a Big Cap 20 and IBD 50 growth leader and a top stock to watch.
In recent years, Deere was considered the Tesla (TSLA) of the agricultural equipment industry. Not any more. With Tesla stock plunging more than 65% year to date, and with Deere up more than 25%, DE stock has made it clear to investors it is the stock to watch. The stock also earns a spot on the IBD Leaderboard list.
Deere and other companies should see a boost from the infrastructure bill and the Inflation Reduction Act. The infrastructure spending plan, which was approved last fall, will dole out more than $500 billion for various projects. And the Inflation Reduction Act includes $369 billion to expedite mining projects and build out renewable energy infrastructure.
Of course, high inflation is exacerbating food insecurity, making it difficult for some households to afford food and other agricultural commodities. And as the conflict between Russia and Ukraine rages on, fertilizers, farm equipment and other agricultural goods are facing supply shortages.
Concerns that the U.S. could enter a recession in 2023 are still valid. The share of Americans who think the U.S. economy is already in a recession eased to 55% from 58% in November and 61% in October, the new IBD/TIPP Poll finds.
But that could be to Deere’s benefit.
John Deere Stock Builds New Base
The iconic agriculture equipment maker is building a flat base with a 448.50 buy point. That comes on the heels of completing a cup with handle with a buy point of 406.12 early last month.
The stock is well above its 50-day moving average and 200-day line, according to MarketSmith. And in the past few days, the Relative Strength (RS) Rating for Deere stock climbed into a new percentile, rising to 95. Market research shows that top-performing stocks typically have an 80 or better RS Rating as they begin their biggest price moves.
John Deere has for more than 40 years used the advertising catchphrase “Nothing runs like a Deere.” It’s a catchy way of comparing its farm machines to the fleet-footed forest animals. And Deere seems content with the way its stock has been running. Deere stock has been even greener than the company’s tractors lately.
Both Deere and heavy equipment maker Caterpillar (CAT) expect to benefit from U.S. infrastructure spending.
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Deere leads IBD’s farm machinery industry group, which itself is ranked No. 11 out of 197 industry groups. Deere’s revenue steadily increased over the past three quarters. And earnings saw one quarter of decelerating growth before spiking 81% with the most recent results.
Bullish Outlook For 2023
Deere gave a strong 2023 outlook in November after beating earnings and revenue estimates for its fiscal fourth quarter, despite supply headwinds.
Deere expects fiscal 2023 net income of $8 billion-$8.5 billion, above consensus and up from $7.13 billion in fiscal 2022. Analysts surveyed by FactSet now see Deere earnings per share of $5.52 on sales of $11.41 billion in the fiscal first quarter ending in January.
“Deere is looking forward to another strong year in 2023 based on positive farm fundamentals and fleet dynamics, as well as an increased investment in infrastructure,” CEO John May said in the earnings release Nov. 23.
This past summer, the farm and construction equipment maker was unable to complete large tractors due to parts shortages. But May said that strong Q4 and fiscal 2022 results reflected “extraordinary efforts to overcome supply-chain constraints, increase factory production, and deliver products to our customers.”
Deere has been growing sales at a robust clip, driven by strength in machinery prices and demand for large farm equipment. But shortages of chips and other parts led to partially built machines, left awaiting parts for workers to complete assembly. An aging farm machinery fleet is driving up replacement demand. Deere also makes excavators, back hoes, dump trucks and wheel loaders for the construction market.
John Deere stock has a stellar 96 EPS Rating after only reporting one quarterly decline in the last eight periods. And Deere has a perfect 99 Composite Rating.
Among other ag stocks to watch are grain processor Archer-Daniels-Midland (ADM) and Lindsay (LNN), a producer of irrigation equipment that is also taking a role in the green hydrogen infrastructure space. Rival farm machinery maker AGCO (AGCO) broke out from a long, deep cup-with-handle base and climbed above its buy point on Wednesday.
Follow Michael Molinski on Twitter @IMmolinski
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