By: Rob Wertheimer
At its recent webcast from CES, Deere gave some clarity on the drivers of its aspirations to take margin up several hundred basis points to around 15%. On our revenue forecast, which doesn’t assume an ag upcycle, such an increase would de-risk the current valuation tremendously, leaving the shares trading under 12x earnings, with what we see as a very large potential from more advanced technology as additional upside. Though many of us had been concerned that the strategy for margin improvement was too tech focused, with not enough time to evolve the mix, the actual plan is a bit more balanced, with tech, aftermarket, and cost cuts all contributing. The 100 bps of margin gain expected by 2022 from tech equates to $300-400mm in incremental earnings, or almost $1 per share.