For a long time, the rising stock price of John Deere seemed to be endless. In 2020, the tractor and machine manufacturer increased more than 55 percent on the American stock exchange NYSE, while that price gain in the first four months of this year cheerfully continued by more than 40 percent to more than $394 per share, the highest level ever.
This was mainly attributable to improved agricultural commodity prices, which contributed to stronger demand for agricultural machinery, said analyst Kristen Owen of US investment bank Oppenheimer. “As many countries reopened, agricultural commodities rose and there was a strong demand for food, fiber and fuels, among other things,” Owen recalls. Moreover, according to her, many farmers in North and South America were due to replace their agricultural machinery during this period. “John Deere is the undisputed leader in North America in terms of market share. They have a strong distribution channel and are one of the most recognized brands in the industry worldwide.”
When the smoke cleared, Deer & Company, as the original American company founded in Illinois in 1837 is called in full, was suddenly worth more than 100 billion euros. In addition to increased demand, the stock also benefits from structural cost savings at the company and the higher operating margin, says ING stock analyst Robert de Jong. “The strong operating leverage of capital-intensive companies, such as Deere, amplifies this effect: higher sales volumes lead to significantly higher profits as fixed costs are spread over a larger number of sales.” He also points to the “record subsidies” the sector has received in the context of the corona crisis and the fact that the company is also active in the construction sector, where it can benefit from the planned large-scale US investments in infrastructure in the coming years.
The fact that the share price of Deere & Co (annual turnover of more than 35 billion dollars, almost 70,000 employees) has since calmed down somewhat, according to Owen, is due to a combination of a normalization of demand and increased inflation, which first hit Deere and other manufacturers of equipment, and more recently farmers.
But what has especially impact is the strike that broke out at the company last month. That hadn’t happened since 1986. More than ten thousand employees gave up work in fourteen American factories because of their dissatisfaction with their salary and pension. Deere reached a preliminary salary deal last week after a month of strikes and two rejections by union members. The new collective labor agreement will cost the company an estimated 3.5 billion dollars, De Jong estimates. He expects Deere to be cautious about issuing forecasts on Wednesday, when the company presents its fourth-quarter results. Nevertheless, fiscal year 2022 also appears to be another strong year given the full order book.
The analyst expects more strikes at other industrial companies next year, given the shortages of factory workers and logistics workers. Globally, Deere competes with AGCO Corp (mainly known for their Massey Ferguson and Fendt brands), CNH Industrial (Case IH, New Holland) and regionally with companies such as Claas (mainly in Europe), Mahindra (India) and Kubota (Asia). Owen: “These companies compete based on price, specific crop types, dealer networks and performance and sustainability.”
Like De Jong, she expects a lot from Deere in the field of precision farming (‘smart farming’), which helps farmers to automate tasks, allowing them to do more with less, and reduce their environmental impact. De Jong: “John Deere is the undisputed market leader in this area and has been investing a lot in R&D for years to develop precision agriculture based on GPS and self-propelled machines. Technology that is easy to implement in the agricultural sector than, for example, on the road, where there are more challenges and obstacles. This is in high demand in the large agricultural countries, such as the US, Brazil, India and South Africa.”
A version of this article also appeared in NRC in the morning of November 22, 2021
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