Is The Market Pricing Deere Fairly?

by Trefis Team
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Deere (NYSE: DE) has had a good start to 2018, as revenue grew by roughly 27% y-o-y. The strong growth in its revenue was due to increased replacement demand for its agricultural equipment, and the company expects this trend to continue through the year. We expect various strategic partnerships, recent technological advancements and U.S. tax reform, coupled with the increasing global population and greater need for infrastructure development, to further boost its top line.

We have created an interactive dashboard analysis to estimate Deere’s valuation based on its expected revenues for 2018. You can modify the key value drivers to see how they impact the company’s revenues, bottom line, and valuation.

We have arrived at a $178 price estimate for the company’s stock, which is nearly 21% ahead of the market price, based on revenue projections of nearly $33 billion for 2018, average shares of nearly 328 million, and a P/E multiple of 19x, which is significantly higher than the figure for 2017.

Agriculture And Construction Market Set To Propel Top Line

Deere’s Agriculture segment accounts for nearly 68% of its overall revenue, and the segment is expected to gain from increased demand for its agricultural equipment, offset by commodity price pressure. For 2018, Deere expects further improvement in the agriculture segment driven by increased replacement demand and demand for new equipment. Further, its most recent acquisition of Blue River Technology should help farmers reduce costs by decreasing the use of herbicides, which should in turn lead to increased demand for its crop spraying equipment and provide decent long-term benefits. We expect the positive outlook for Deere to continue into 2018, driven by improving conditions of the agriculture market, and increased global food consumption, which will likely spur demand for its agriculture products.

The Construction segment contributes nearly 20% of overall revenues and has been the fastest-growing segment of late, primarily due to the higher shipment volumes and its acquisition of Wirtgen Group. In addition, strengthening of the U.S. economy should boost the U.S. Housing market and construction spending. The industry is expected to grow further in 2018 which, coupled with the Wirtgen acquisition, should boost Deere’s construction business.

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