Deere & Co.'s (DE, Financial) increasingly innovative strategy could lead to improving financial performance in what is expected to be a growing industry.
The agricultural machinery manufacturer is continuing to invest in new products in order to improve the customer experience, as well as digital opportunities that may differentiate it from rivals.
Despite the stock climbing 18% over the last year, outperforming the S&P 500 by 10%, the company’s valuation suggests it offers a margin of safety when its growth potential is factored in.
Digital opportunities
Deere’s investments in its digital offering is helping to increase differentiation versus competitors. For example, the company’s operations center allows farmers to plan, control and analyze their operations. This helps to improve customer productivity by adding the right amount of nutrients, herbicides and pesticides at the right time in order to maximize crop yields.
The center is resonating with customers as 145 million unique engaged acres were entered into its system. Since the operations center is compatible with other industry participants, it has the potential to appeal to a wide range of customers in a variety of markets.
New products
The company’s new products allow it to expand into new markets and to increase the size of its total addressable market. In the last fiscal year, for example, Deere launched SmartGrade motor graders to meet the needs of large contractors.
Deere is also increasing the availability of its precision-guidance system AutoTrac, which boosts productivity by increasing assisted steering efficiency. It is now available in over 100 countries.
Innovation
The company is boosting the appeal of its products through innovative features. For example, last year it introduced an easy change oil system across its 100-series lawn tractors. The system increases engine-oil life, while cutting waste oil by around 60% in some cases. Deere has also included an eco mode in a range of its crawlers that increases fuel economy by up to 20%, thereby reducing costs for consumers.
In addition, the company’s Connected Support service continues to enhance the customer experience. It allows dealers to remotely monitor the status of assets and send alerts to users in anticipation of future problems, thereby potentially reducing downtime.
Risks
The continued uncertainty surrounding the global economy is causing challenges for U.S. farmers. It also has the potential to hurt investor sentiment in the short term. Additionally, grain farmers are facing weather-related planting delays and uncertain short-term demand prospects as a result of African swine fever. The has caused a reduction in commodity prices, with Deere downgrading its large agricultural segment sales forecast for the full fiscal year in its most recent quarterly update.
In response to challenging operating conditions, Deere has modified factory schedules and is actively identifying opportunities to reduce costs.
Over the long term, the company’s sales are set to be catalyzed by a growing world population. By 2050, the world’s population is forecasted to reach 9.8 billion. This is expected to lead to a doubling of agricultural production during that period, while increasing wealth levels are expected to produce a higher demand for meat products that require grain in the supply chain. This is expected to lead to increasing demand for the company’s products and services.
Outlook
Deere’s forward price-earnings ratio of 16.1 suggests it offers good value for money. It is forecasted to record a 13.3% increase in earnings per share in the next fiscal year, while the strategy it is adopting could produce continued growth over the long run.
The company’s increasing focus on digital operations and innovation could differentiate it from peers, as well as improve the customer experience.
In addition, new products and rising demand over the long term due to population growth may strengthen its competitive position.
Even though it has recorded relatively high growth compared to the S&P 500 in the last year, the stock appears to still have investment appeal.
Disclosure: The author has no positions in any stocks mentioned.
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