Deere Strong Outlook Expected Despite Risks: Goldman Sachs Weighs In Ahead Of Thursday Earnings
Deere Strong Outlook Expected Despite Risks: Goldman Sachs Weighs In Ahead Of Thursday Earnings
As Deere & Co (NYSE:DE) prepares to release its third-quarter earnings report before the market opens on Thursday, analyst Jerry Revich and team at Goldman Sachs are focusing on the potential risks facing the company's captive finance business in a challenging environment for farmer incomes.
According to a recent analyst note, the team finds that Deere's finance operations are largely resilient, with a significant portion of its loan portfolio showing minimal risk.
Deere on Thursday is expected to report EPS of $5.77 on revenue of $10.944 billion.
What Investors Need To Know: Goldman Sachs highlights that Deere's captive finance business has demonstrated resilience, with 75% of its loan portfolio exhibiting minimal risk. Wholesale receivables, which make up 25% of the portfolio, have historically experienced negligible losses due to the profitability of dealers and the asset-backed nature of the loans.
The team at Goldman Sachs projects that peak write-offs could potentially impact EPS by up to 85 cents for fiscal year 2024.
Applying the worst-case scenarios from historical credit losses to Deere's current portfolio, Goldman Sachs indicates a possible $235 million reduction in net income, compared to the company's guidance of $770 million for its financial services segment.
Read Also: Big Tech Breakup 'Highly Unlikely' Despite Google's DOJ Antitrust Setback, Says Wedbush's Dan Ives, But Expect 'Business Model Tweaks'
Despite these concerns, Goldman Sachs sees Deere's financial outlook remaining positive. The company is expected to generate revenues of approximately $45.1 billion for the fiscal year ending October 2024, with gradual growth anticipated in subsequent years.
The stock is currently trading at 14 times the mid-cycle EPS estimate of $24.50, presenting a favorable risk-reward ratio, particularly as the market stabilizes from its current trough.
What Else: Goldman Sachs believes Deere's strong positioning is supported by its investment in Precision Agriculture technologies and a reduction in used equipment inventories by 5% over the past three months. However, the company faces potential risks from adverse weather conditions affecting crop yields, inventory build-ups in China, and ongoing supply chain constraints.
Goldman Sachs maintains a Buy rating on Deere, with a 12-month price target of $466, based on a valuation of 19 times the mid-cycle EPS estimate. The outlook reflects confidence in Deere's ability to navigate through cyclical challenges and leverage its strong market position for continued earnings growth.
Price Action: DE, which was trading at $352.02 on Wednesday, has a 52-week high of $435.74 and a 52-week low of $340.20.
- Alibaba Vs. JD: Which Chinese E-Commerce Stock Is The Better Investment Ahead Of Earnings?
Photo: Shutterstock