Construction & Engineering
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DE $438
23 Nov 2022 |
High tech down on the farm: Deere sees ‘total autonomy’ by 2030
Shares of farming construction equipment leader Deere & Company (DE $438) rose 5% on Wednesday following a sterling earnings report. Revenue surged 37% year-over-year, to $15.5 billion, with all major business lines notching big sales increases. With booming commodity prices, farmers are reaping increased cash yields, and they are putting much of that money to work in new equipment. The big sales gains flowed directly down to the bottom line, with profits soaring 75%—to $2.2 billion. As if the actual numbers weren’t enough to make investors swoon, management followed up with strong 2023 projections. CEO John May sees increased investment in infrastructure next year—despite high odds of a recession—and a “healthy demand for our equipment.” Rachel Bach, manager of investor communications, said dealers “remain on allocation” for the year, with the order books already filled into the third quarter. The company also sees a transformational trend taking root in the industry over the next decade with respect to automation. Deere believes we could see “total autonomy” in corn and soybean production within the US by 2030. Not only does that mean increased sales of new, high-tech equipment, it also means new recurring revenue models. Imagine farmers calling on the company’s AI to identify weeds in the field and spray nutrients with pinpoint accuracy. Consider how important that ability becomes with the sky-high price of agriculture inputs like nitrogen, phosphate, and potash. Deere plans to grow their recurring revenue streams by 10% before the end of the decade—we believe those estimates are conservative. It's hard to believe it has been two years since we wrote about Deere’s impressive comeback following the brutal downturn during the initial days of the pandemic. At the time, Deere shares were trading for $256, and Morningstar had a fair value of $183 on them along with a one-star (“Sell”) rating. We didn’t agree with their thesis. Today, Deere shares are sitting at $438 and Morningstar has raised its weighting to two stars (“Underweight”) and placed a $354 fair value on the shares. Ditto what we said precisely two years ago—we ardently disagree. Maybe the company should do a 10-for-1 stock split; after all, doesn’t $44 per share sound more appealing to many investors than $438? (We are being facetious, but—sadly—that is how too many investors scour for “undervalued” stocks.) |
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DE
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Farm equipment companies are gearing up for a blowout 2021; Deere's most recent quarter supports that thesis
(25 Nov 2020) John Deere (DE $256), the world's leading manufacturer of agricultural equipment, got hit especially hard when the pandemic seized up global economic activity this past spring. That made perfect sense, as CFOs turned on a dime to an ultra-defensive attitude. Considering the premium price attached to Deere equipment (a new 95-series tractor might cost upwards of half-a-million dollars), companies made due with the equipment on hand. Following the sharpest economic decline in US history in Q2, all eyes turned to the third quarter, and especially to the farm and heavy construction machinery industry. To say Deere did not disappoint is putting it mildly. In the company's fiscal fourth quarter, which ended 31 October, equipment sales came in at $8.7 billion—against $7.7B expected, and earnings per share hit $2.39—against $1.49 expected. As if those blowout numbers weren't good enough for the analysts, the company raised its full-year 2021 guidance, citing an expected 5% to 10% jump in equipment sales in virtually every region of the globe. It is always enlightening to look at the various analyst ratings on a company surrounding an earnings release or any other major news item. For example, Morningstar has a one-star (sell) rating on DE shares with a fair value of $183. Most analysts are bullish to neutral on the $80 billion firm, however. We think the shares of both Deere and Cat (CAT $175), each with a PE ratio of 29, seem fairly valued where they are at. |
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JCI
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Penn member Johnson Controls up 4% after Argus upgrade. (21 Aug 2018) Admittedly, $37 billion construction and engineering firm Johnson Controls (JCI $33-$40-$43) hasn't done much since we added it to the Penn Global Leaders Club last year. It now appears, however, that the company may be ready to dust off the cobwebs and begin a new stretch of outperformance. Shares rallied about 4% after analyst house Argus Research raised the firm to a "buy," with a $45 per share price target. We see a fair value for the shares closer to the $50 range. Johnson operates in two distinct industry segments: the building technologies unit builds, installs, and services HVAC systems and provides fire and security solutions; the power unit makes vehicle batteries which are sold to both automakers as an OEM (Original Equipment Manufacturer) and aftermarket retailers. We wrote about Johnson Controls in the Penn Wealth Report, Vol 6, Issue 01.
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Industrials. Could Westinghouse declare bankruptcy while building America's first new nuclear power plants in a generation? Let's first put this on the table: Westinghouse hasn't been an American company in a long time. For the past 11 years, in fact, it has been owned by Japan's Toshiba. Based on the amount of cash the company has been burning through, the joke was on Toshiba. Now, after a $6.3 billion write-down due to massive cost overruns at four new nuclear power plant projects in South Carolina and Georgia, the unit is reportedly consulting with US bankruptcy lawyers. While Toshiba says it is not aware of any plans for Westinghouse to file for Chapter 11, the parent company has asked a Japanese law firm to gauge the impact of such a move. For their part, the two utility companies overseeing the construction of the power plants have made it clear that they expect Westinghouse to fulfill their commitments, whether they are operating in Chapter 11 bankruptcy or not. Probably the worst $5.4 billion dollar investment Toshiba has ever made.