1 Stock That Has Upside & Pays You DividendsJun 07, 2022
When you think of John Deere, lawnmowers and agricultural equipment may come to mind. At first glance, you may be tempted to pass by this investment opportunity thinking it's a boring play.
But that couldn't be further from the truth.
Beneath the surface, John Deere is an absolute beast in the industrials sector and has a ton of upside opportunity over the course of the next year.
So what has us so excited about this stock?
Let's get into the details below 👇
John Deere Overview:
During their most recent Analyst Day, John Deere talked about what is going to drive earnings growth over the next several years.
And in case you missed it, earnings growth is more important than any other metric in the markets right now.
For the first time in a decade, companies are being judged on how efficient they are with their businesses rather than just how fast they can grow their revenues.
And while John Deere is growing revenues, EPS (a measure of earnings) is set to drastically increase. So, in order to answer the question above, there are 3 main items that have us so excited about John Deere going forward. They are:
While the word autonomy may scare some people off, John Deere has been automating many of its operations over the years. Ever since their acquisition of NavCom in 1999, making things more efficient and automating monotonous tasks, has been core to their overall identity. And with that acquisition serving as the core of their autonomous capabilities, John Deere has pushed forward initiatives that have helped farmers dramatically. One such instance is via the release of the 8R tractor. With this rollout, John Deere gave farmers more autonomous capabilities for corn and soybean production. If we lost you, basically John Deere is enabling farmers to grow and yield more crops per employee -- making them more profitable. And since this model has created more demand for their product, they've been able to yield more continuous revenue while also "farming" for tractor data (sorry for the awful pun). In the long run, this data play will prove to be very valuable as they're able to map crop production better than anyone else.
The next impressive feat pushing earnings growth is their sense & act technology. And honestly, this is really cool. Basically, this technology gives their software the human sense of sight and then acts on it. Sound too good to be true? In the case of John Deere, it isn't. This technology is allowing their machines to separate weeds from useful crops, and then only spray the weeds to reduce their growth. So what it does is two things -- first, it reduces the use of herbicide (estimated by up to 2/3rds) within a field and it secondly also reduces the cost for the farmer ($35B in annual herbicide spend). And that is just step one for this technology. Over time this will evolve and help their products do more than just help farmers do their day jobs. It'll then help them do their jobs better, faster, safer (expected to cut CO2 emissions by 15%), and more cost-effective which ends up profiting the entire system.
The last area that's helping John Deere become more profitable lies in their data. As we mentioned above, this tractor data is going to be worth a lot of money from multiple different angles and they've already connected ~300k of their machines (expected to 3x by 2026) to the cloud to date. But the first area it'll be helpful in is by making farmers smarter. Already, John Deere customers can connect their devices and get unique insights into their farms. In particular, they can get real-time status updates on their machines and get suggested working plans that overlap with weather data in order to better plan ahead. And while that's really cool within itself, the real data kicker will be in what they can sell to investors. Yes, you read that right. While John Deere has not gone ahead and said it yet, there's speculation that they're going to start monetizing this data by selling it to investors who are trying to get ahead on crop yields, commodity prices & other factors. While this is not a revenue source yet, there are huge revenue opportunities in this area further down the line. What's pushing us to confirm this fact is that they've hired a CTO and now view themselves "as a tech company".
Like we told you in the intro, John Deere may not seem like a sexy investment, but they're doing some really cool things that is pushing innovation in an industry that most investors often ignore.
But while they're pushing innovation, they're also doing it in a very responsible way. And this is going to be directly reflected in their future earnings.
John Deere Financials:
And looking closer at their projected earnings we see that John Deere will be able to lump two different revenues streams together -- both recurring and non-recurring.
While this may not seem like a big deal, moving more and more of their revenue into recurring revenue is favored highly by investors. This is because we can easily project what they will make in the coming years. Therefore this revenue is usually valued higher.
On top of that John Deere plans on paying out higher dividends and also buying back more shares -- both of which signal strong financial prospects. Looking even further we see that John Deere raised their 2030 margin target to 20% while also keeping its credit rating at an A.
Long story short, John Deere is doing a lot to grow responsibly and we're extremely encouraged by their stock over the long run. With the stock actually up this year, we think the next 12 months should be favorable.
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Current Price: $360
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