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Why investors are not averse to John Deere
The John Deere share has recovered surprisingly quickly from the stock market dip due to the corona crisis. After a sharp price fall in March, the share started to rise and the all-time highest level is now within reach. Apparently, investors are not averse to the machine builder who, like Netflix, benefited from the lockdown.
The stock, listed on the S&P 500, has risen more than 50% since mid-March to $175 a share. The share thus outperforms the stock market index itself, which has also risen considerably in recent months. It appears to be only a matter of time before John Deere's share price will break the record level of November last year, given that it is only a handful of dollars at the end of July.
Strong brand
Where does the strong advance come from? According to stock analysts, this is primarily because John Deere is a strong brand with a solid financial balance. Every American recognizes the green-yellow logo from a distance and the machine builder is also widely known outside of it. In times of (economic) uncertainty, investors fall back on recognisability and reliability, and the share benefits from this. A bit of stock market psychology.
The underlying results have also been good lately. Between 2017 and 2019, sales increased by 32% to a whopping $39 billion. The net margin increased to 8,3% last year, which is not bad, although according to analysts it could be even better. The first quarter of the broken fiscal year 2020 continued on the right track. The machine builder also sees a bright future for the coming years.
According to CEO John May, arable farmers in the American home market often still work with outdated machines, which means that replacement investments are not long in coming, in his view. In addition, the need for service and maintenance will increase in the meantime. Of course, the investment willingness of (American) farmers will depend strongly on grain prices and other crop yields, which has become quite tricky due to the corona crisis.
Cleaning anger at home
At the same time, the corona crisis also offers opportunities. Not only Netflix and Microsoft Zoom, but also John Deere benefited from the mandatory stay at home during the lockdown. The clean-up anger of consumers gave consumer sales of lawn mowers and garden machines a boost, although the concrete sales figures are still lacking. The urge to buy is especially nice for the short term. In the longer term, consumer purchasing power is under pressure as the economy is hit hard by the effects of the lung virus.
Like many publicly traded companies, Deere has withdrawn its 2020 forecast. This means that investors are looking to the future. Still, many investment banks have the John Deere share on the buy list and with that a further price increase is in the offing. US investment bank Jefferies Group recently raised its 2020 price target by $35 to $200 per share. Given the economic uncertainty, this seems rather ambitious.
Wouter Job
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