Part 6

Deere & Company (DE)

Company Background

John Deere is the brand name of Deere & Company, an American corporation founded in 1837, which is the world’s largest producer of agricultural equipment, manufacturing agricultural machinery, construction, forestry machinery, diesel engines, drivetrains (axles, transmissions, gearboxes) used in heavy equipment, and lawn care equipment. In 2019, it was listed as 87th in the Fortune 500 America’s ranking and was ranked 329th in the global ranking. The company also provides financial services and other related activities.

Deere & Company is listed on the New York Stock Exchange under the symbol DE. The company’s slogan is “Nothing Runs Like a Deere”, and its logo is a leaping deer, with the words ‘JOHN DEERE’ under it. Various logos incorporating a leaping deer have been used by the company for over 155 years. Deere & Company is headquartered in Moline, Illinois.

Current position – Financial Performance & Future Growth Prospects

From a financial standpoint the company generated revenues of around $24 billion or 60% of total revenues in fiscal 2019 from the sale of agriculture and turf equipment. What’s interesting is that with a market capitalization of $78.53 billion, IL-based Deere is the only agricultural and farm machinery player in the S&P 500 Index.

The Agriculture and Turf segment is by far the company’s golden egg even though Deere & Co. has done a lot of work on diversifying its product portfolio throughout the years. This leading segmen manufactures farm equipment and related service parts, including tractors, sugarcane harvesters, sprayers, irrigation equipment, and more. Apart from its industrial presence Deere & Co. also manufactures and distributes equipment, products and service parts for commercial and residential use.

One of the first major attempts for the company to build additional revenue streams outside of the Agriculture and Turf segment was back in the 1950s, when the company formed the construction-equipment division, which is currently the Construction and Forestry division. The segment generated revenues of $11 billion in fiscal 2019, contributing 28% of Deere’s revenues. As the 2nd largest revenue source for the company this division manufactures broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. Deere also manufactures and distributes road building equipment through its wholly-owned subsidiaries of the Wirtgen Group.

The company is considered to be a leader in almost every category that it operates in, as its multi-decade history, strong corporate culture, outstanding senior management and last but not least superior products have all contributed to the creation of an exceptionally strong foundation for Deere’s future. The company has a product advantage in most farm machinery categories as its machines come with better features and are better constructed than its competitors. Furthermore, Deere boasts a broad distribution network, which is an essential component for the consistent revenue growth for the company. Deere has also been growing its presence in the field of precision agriculture through various acquisitions like Blue River, NavCom Technology. It’s no wonder that the company is currently the world leader in precision agriculture. Deere’s senior management has stated on many occasions that it remains focused on revolutionizing agriculture with technology, in an effort to make farming automated, easier and more precise across the production process. Notably, Deere spends around 8% of sales on R&D.

Deere also finances sales and leases by John Deere dealers for new and used agricultural, commercial and consumer, and construction and forestry equipment through its Financial Services segment (10% of fiscal 2019 revenues). Increased global demand for food, shelter and infrastructure from a burgeoning population will continue to drive Deere going forward.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 6 months taking the price from the March 23rd lows of around $110 to the highs at $265, thus representing a 141% increase in 6 months. New all-time highs were first reached in the middle of October and ever since then, we have seen a volatile roller-coaster price action for the stock and the XLI ETF altogether. An initial correction took the price down with over 8.7% in just 1 week between the 20-28th of October. Then, we saw another sharp rally as the price made an attempt to re-test the all-time highs and the psychological resistance lying there. The stock managed to break the $243 resistance in the first couple trading sessions of November, which was then followed by a continued appreciation towards the new ATH at $265, this development took place right after the release of the final results of the US Presidential Elections. Now, with the elections behind us the stock is seeing a strong rejection from the diagonal upward sloping trendline resistance laying around the $265 mark. The sharp decline on November 9th shows that the bullish momentum now seems relatively weaker than the one we saw in early September and mid-October as the RSI is trading significantly lower now than in both of these prior instances. This in turn might be a signal that one of the best performing Industrial stocks so far this year and a company that we firmly believe in for the long term, might be due for a meaningful pullback from the current all time high levels. The current rejection at $265 will form a Triple Divergence reversal pattern on the daily chart. Does, this remind you of something? Well, that is exactly what we got from the SPY, PYPL, AMD, CAT daily charts – a relatively weaker attempt for a push above the ATH, with an overall fading bullish momentum.

We would wait for a short-term pullback towards the $240 mark and start buying just above the support at $239. Should the price drop further, we would be interested in adding more to our buy positions at the $229 and $210 levels, which would improve our average cost basis. Our first take-profit target would be set at $270, followed by the next target at $285 where we would be fully cashing in our profits.

The stock is currently sitting at the $249 mark after dropping from the strong diagonal trendline resistance around $265. The volatility and a potential correction was an anticipated scenario in the lead up to the elections as when there are high levels of uncertainty in the market, then even the best stocks out there could become vulnerable. Additionally, lets not forget that DE’s stock has already appreciated with the staggering 141% from its March lows, thus these current corrective movements, could very well be considered healthy and necessary for the continuation of the uptrend. However, it is of essential importance to note that if the stock fails to resume its uptrend by pushing to a higher high soon, then this might create a very strong reversal technical pattern called a Triple Divergence formation with the RSI. The neckline of this figure would be around the $232 mark and a potential break there could open up the doors for a much larger decline towards the $210 level.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, presidential elections, the economic recovery etc. – and that we could be in for a sideways and choppy price action in the coming months, we see the winners continuing to win. We remain cautiously bullish on DE’s stock and believe that any profit-taking corrections and potential larger price declines would give us a great opportunity to buy the stock at a good discount and hold it for the long term. This, in turn would give us a chance to maximize our profits to the upside, once the stock resumes its strong uptrend. Furthermore, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing that the price might not have enough steam to break the current diagonal trendline, horizontal and psychological resistances that it faces. The exhaustion of the recent up move could be signaling that a potential short-term decline could be just around the corner. Thus, we are not advising our followers to go ahead and start buying the stock right now at its current highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

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