Deere is the undisputed king of farming equipment with strong demand from a global food crisis
Deere is the largest farming equipment company globally — controlling 53% of the U.S tractor market.
The company wants to help farmers become more efficient with better tech, self-driving tractors and software — which could also become the key to driving its stock higher…
The backstory: Global food crisis
Global hunger has been on the rise from conflicts, natural disasters and climate change. The Russian invasion added to the crisis — hitting supply chains and sending crop and fertilizer prices soaring.
Then, two things happened:
- High crop prices incentivized farmers to buy more equipment.
- Rising fertilizer, fuel and labor costs drove the need for efficiency.
Tractor demand has been so high that many of Deere’s tractors are sold out. Great, except Deere can’t meet that demand with a chip shortage.
Deere has also been struggling with soaring costs — which rose 24.4% in the recent quarter — resulting in Deere lowering its full-year earnings forecast.
The future: Self-driving tractors
Deere has invested billions into tech to improve farmer efficiency — aiming for 10% of sales to come from software fees by the end of the decade.
Software is a lot more profitable than equipment. A 2021 Bernstein report estimates farming software to have 85% gross margins — compared to 25% for equipment (WSJ).
Investors: Humans need to eat…
…and that food must come from somewhere, provided by humans or robots. Investing in Deere is like investing in the picks and shovels of an industry (agriculture) that isn’t going away.
$DE has provided investors with consistent returns over the past 20 years — outperforming the S&P 500’s (2,174% vs. 552%). Even more, if you consider its dividend, which it’s paid since 1995 (yield currently at 1.2%).
- Per Edward Jones analyst Matt Arnold, “Demand remains very strong, and earnings are eventually going to reflect that strength” (BBG).
- The world’s food shortage problems aren’t going away anytime soon, but Deere’s cost issues may only be temporary.