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USDA Projects Farm Income to Dip 4% for 2024: How to Play the DE Stock?
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Deere & Company (DE - Free Report) has been facing challenges due to weak farmer spending amid low commodity prices. This weighed on its earnings and share price performance. The U.S. Department of Agriculture’s (USDA) report released on Sept. 5 suggests that while farm income will decline in 2024, it will be less severe than previously expected. USDA expects production costs to be favorable for farmers this year.
Deere’s shares dipped 2% on Sept. 5, following USDA’s revised outlook, and have lost 1.2% since. Year to date, DE shares have lost 3.1% compared with the industry’s 6.6% decline.
Image Source: Zacks Investment Research
The key question is whether it is the right time to invest in Deere. Let us delve deeper into the headwinds the company has been facing and find out potential drivers.
Weak Demand Hurt DE’s Performance
Deere, the renowned manufacturer of iconic green and yellow agricultural equipment, reported year-over-year declines in revenues and earnings in the first three quarters of fiscal 2024. The dismal performance was attributed to lower shipment volumes across all segments due to weak demand. This was somewhat negated by gains from Deere’s pricing strategies and cost-saving measures.
Agricultural equipment sales have taken a blow, as evidenced by the 18% decline in the first nine months of fiscal 2024. Farmer spending has been muted against the backdrop of low commodity prices, persistent inflation and high interest rates. DE’s Construction & Forestry segment saw a year-over-year decline of 7% in sales during the period.
The Farm Progress Show, the largest outdoor agricultural event in the United States, was held on Aug. 27-29 this year. It has been a crucial gathering for agricultural professionals and industry leaders showcasing their latest innovations for over five decades.
Deere brought its Gator XUV 845 (gas) and XUV 875 (diesel) utility vehicles for their first public viewing at the show this year. Peer AGCO Corporation (AGCO - Free Report) unveiled a range of products, such as Fendt 600 Vario tractors, Massey Ferguson 9S tractors and Gleaner T Series combine. CNH Industrial (CNH - Free Report) showcased its AF9 and AF10 combines.
However, farmers' attendance was relatively lower this year and buyers were more interested in used machinery rather than new equipment.
DE to Cut Output & Costs, Expects Lower Profits in FY24
Deere maintained its guidance of net income for fiscal 2024 at $7 billion, which suggests a 31% year-over-year decline. The company projects year-over-year declines in revenues and profits of all segments in fiscal 2024.
DE has taken steps to reduce costs, and intends to cut down production volumes and manage inventory during the remainder of 2024. This will position the company well for the next year.
Analysts seem to be losing confidence in the DE stock, evident from the downward earnings estimate activity for both fiscal 2024 and fiscal 2025 as seen over the past 60 days.
Image Source: Zacks Investment Research
The consensus estimate for both fiscal 2024 and fiscal 2025 bottom line suggests year-over-year declines.
Image Source: Zacks Investment Research
USDA Sees Milder Dip in Farm Income: Ray of Hope for Deere?
The USDA projects a net farm income of $140 billion for 2024, indicating a decline of 4.4% from that reported in 2023. Its earlier forecast had indicated a steep 25.5% drop. Farm income decreased 19.5% in 2023. The shift in estimates is attributed to a stronger-than-expected performance in the livestock sector and lower production expenses.
Net cash farm income is expected to decrease 7.2% to $154.1 billion in 2024.
Image Source: USDA
Total crop receipts will decline 10% to $249 billion due to lower receipts for corn and soybeans, as lower prices due to an increase in supply should negate gains from higher sales volumes. Total animal/animal product receipts are projected to increase 7% to $267.4 billion in 2024.
USDA expects production expenses to decline 1% from that reported in 2023. Feed, fertilizer and pesticide expenses are expected to see the largest declines in 2024, while livestock/poultry purchases are expected to be higher. However, labor expenses will continue to be a headwind.
Easing production costs and the slightly improved outlook for farm income will provide some respite to Deere’s customers.
What Does Deere’s Valuation Suggest?
DE is currently trading at a forward 12-month earnings multiple of 16.97X, at a premium to the industry’s 14.38X. It is also higher than DE’s five-year median of 15.48X.
Image Source: Zacks Investment Research
DE’s Focus on Technology, Brand Position Provide an Edge
Increased global demand for food, driven by population growth and rising standards of living, will support the demand for agricultural equipment. The U.S. agricultural machinery market is expected to witness a compound annual growth rate of 6.3% between 2024 and 2027, and reach $53.7 billion in 2027. The need to replace aging equipment will also support demand.
With increasing farm sizes, there is a greater need for labor, but escalating labor costs are prompting farmers to turn to mechanization. Deere has been continuously focused on launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Precision agriculture technology is expected to be a key catalyst. The demand for the company’s construction equipment will be supported by increased infrastructure spending. DE’s solid product portfolio and well-established dealer network position it well to ride on these trends.
DE Offers Higher Returns, Dividend Yield Than Industry
Deere’s trailing 12-month return on equity is 42.3%, ahead of the industry’s average of 31.6%. Return on equity reflects how effectively a company is utilizing its shareholders’ funds in its operations to generate income. Its return on assets is at 9.1%, ahead of the industry’s 6.1%, indicating that the company has been utilizing its assets efficiently to generate returns.
DE’s current dividend yield of 1.52% outscores its peers AGCO and Lindsay Corporation’s (LNN - Free Report) dividend yields of 1.30% and 1.26%, respectively. Over the past five years, Deere raised its dividend five times, registering a five-year dividend growth rate of 17.2%. Its payout ratio is 19.65%, higher than the industry’s average of 19.62%.
Conclusion: DE Stock is a Hold for Now
Deere’s market share leadership position, investment in technology and strong dealer network provide it with a competitive advantage to capitalize on the long-term demand prospects for both agricultural and construction equipment.
Despite the USDA projecting a pared outlook, farm income will remain impacted this year. Based on this, combined with negative estimate revision activities and expensive valuation, we believe that new investors should wait for a better entry point for Deere. Existing shareholders might consider holding on to their shares as the company navigates these headwinds. Deere currently carries a Zacks Rank #3 (Hold).
Image: Bigstock
USDA Projects Farm Income to Dip 4% for 2024: How to Play the DE Stock?
Deere & Company (DE - Free Report) has been facing challenges due to weak farmer spending amid low commodity prices. This weighed on its earnings and share price performance. The U.S. Department of Agriculture’s (USDA) report released on Sept. 5 suggests that while farm income will decline in 2024, it will be less severe than previously expected. USDA expects production costs to be favorable for farmers this year.
Deere’s shares dipped 2% on Sept. 5, following USDA’s revised outlook, and have lost 1.2% since. Year to date, DE shares have lost 3.1% compared with the industry’s 6.6% decline.
The key question is whether it is the right time to invest in Deere. Let us delve deeper into the headwinds the company has been facing and find out potential drivers.
Weak Demand Hurt DE’s Performance
Deere, the renowned manufacturer of iconic green and yellow agricultural equipment, reported year-over-year declines in revenues and earnings in the first three quarters of fiscal 2024. The dismal performance was attributed to lower shipment volumes across all segments due to weak demand. This was somewhat negated by gains from Deere’s pricing strategies and cost-saving measures.
Agricultural equipment sales have taken a blow, as evidenced by the 18% decline in the first nine months of fiscal 2024. Farmer spending has been muted against the backdrop of low commodity prices, persistent inflation and high interest rates. DE’s Construction & Forestry segment saw a year-over-year decline of 7% in sales during the period.
The Farm Progress Show, the largest outdoor agricultural event in the United States, was held on Aug. 27-29 this year. It has been a crucial gathering for agricultural professionals and industry leaders showcasing their latest innovations for over five decades.
Deere brought its Gator XUV 845 (gas) and XUV 875 (diesel) utility vehicles for their first public viewing at the show this year. Peer AGCO Corporation (AGCO - Free Report) unveiled a range of products, such as Fendt 600 Vario tractors, Massey Ferguson 9S tractors and Gleaner T Series combine. CNH Industrial (CNH - Free Report) showcased its AF9 and AF10 combines.
However, farmers' attendance was relatively lower this year and buyers were more interested in used machinery rather than new equipment.
DE to Cut Output & Costs, Expects Lower Profits in FY24
Deere maintained its guidance of net income for fiscal 2024 at $7 billion, which suggests a 31% year-over-year decline. The company projects year-over-year declines in revenues and profits of all segments in fiscal 2024.
DE has taken steps to reduce costs, and intends to cut down production volumes and manage inventory during the remainder of 2024. This will position the company well for the next year.
Deere’s Downward Estimate Revision Suggests Y/Y Declines
Analysts seem to be losing confidence in the DE stock, evident from the downward earnings estimate activity for both fiscal 2024 and fiscal 2025 as seen over the past 60 days.
Image Source: Zacks Investment Research
The consensus estimate for both fiscal 2024 and fiscal 2025 bottom line suggests year-over-year declines.
Image Source: Zacks Investment Research
USDA Sees Milder Dip in Farm Income: Ray of Hope for Deere?
The USDA projects a net farm income of $140 billion for 2024, indicating a decline of 4.4% from that reported in 2023. Its earlier forecast had indicated a steep 25.5% drop. Farm income decreased 19.5% in 2023. The shift in estimates is attributed to a stronger-than-expected performance in the livestock sector and lower production expenses.
Net cash farm income is expected to decrease 7.2% to $154.1 billion in 2024.
Image Source: USDA
Total crop receipts will decline 10% to $249 billion due to lower receipts for corn and soybeans, as lower prices due to an increase in supply should negate gains from higher sales volumes. Total animal/animal product receipts are projected to increase 7% to $267.4 billion in 2024.
USDA expects production expenses to decline 1% from that reported in 2023. Feed, fertilizer and pesticide expenses are expected to see the largest declines in 2024, while livestock/poultry purchases are expected to be higher. However, labor expenses will continue to be a headwind.
Easing production costs and the slightly improved outlook for farm income will provide some respite to Deere’s customers.
What Does Deere’s Valuation Suggest?
DE is currently trading at a forward 12-month earnings multiple of 16.97X, at a premium to the industry’s 14.38X. It is also higher than DE’s five-year median of 15.48X.
Image Source: Zacks Investment Research
DE’s Focus on Technology, Brand Position Provide an Edge
Increased global demand for food, driven by population growth and rising standards of living, will support the demand for agricultural equipment. The U.S. agricultural machinery market is expected to witness a compound annual growth rate of 6.3% between 2024 and 2027, and reach $53.7 billion in 2027. The need to replace aging equipment will also support demand.
With increasing farm sizes, there is a greater need for labor, but escalating labor costs are prompting farmers to turn to mechanization. Deere has been continuously focused on launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Precision agriculture technology is expected to be a key catalyst. The demand for the company’s construction equipment will be supported by increased infrastructure spending. DE’s solid product portfolio and well-established dealer network position it well to ride on these trends.
DE Offers Higher Returns, Dividend Yield Than Industry
Deere’s trailing 12-month return on equity is 42.3%, ahead of the industry’s average of 31.6%. Return on equity reflects how effectively a company is utilizing its shareholders’ funds in its operations to generate income. Its return on assets is at 9.1%, ahead of the industry’s 6.1%, indicating that the company has been utilizing its assets efficiently to generate returns.
DE’s current dividend yield of 1.52% outscores its peers AGCO and Lindsay Corporation’s (LNN - Free Report) dividend yields of 1.30% and 1.26%, respectively. Over the past five years, Deere raised its dividend five times, registering a five-year dividend growth rate of 17.2%. Its payout ratio is 19.65%, higher than the industry’s average of 19.62%.
Conclusion: DE Stock is a Hold for Now
Deere’s market share leadership position, investment in technology and strong dealer network provide it with a competitive advantage to capitalize on the long-term demand prospects for both agricultural and construction equipment.
Despite the USDA projecting a pared outlook, farm income will remain impacted this year. Based on this, combined with negative estimate revision activities and expensive valuation, we believe that new investors should wait for a better entry point for Deere. Existing shareholders might consider holding on to their shares as the company navigates these headwinds. Deere currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.