Deere & Company (DE) to outrun the Market in the next 2 to 3 years?

William Blair Analyst Lawrence De Maria believes Deere & Company’s (DE) profit could double no later than 2023. He says the supersized growth should come from lowering costs, demand driven by regional markets, and upgrading from older equipment. (1) De Maria failed to say what doubling the bottom line might mean for Deere’s shareholders, so let’s take a shot at creating possible price targets.

Wall Street forecasts consensus earnings per share (EPS) of $6.40 for this year. Next year, the bottom line is projected to hit $8.64. (2). Double this year’s projected profits would put EPS close to $13 per share.

Doubling from this year’s forecast to 2023 equals a compound annual growth rate (CAGR) of 26%. In the last five-years, the industrial machinery maker averaged 11.83% growth. At the same time, the mean price to earnings (P/E) ratio was 17.49. Deere traded at a 48% P/E premium to its earnings growth.

If investors awarded Deere shares the same bonus based on a 26% increase, then the price to earnings ratio would be 38.48. The premium P/E times possible 2023 earnings of $12.40 would put DE at $477.15. The stock closed today at $153.16.

That P/E and price target are most likely aggressive. Since 2015, Deere shares maxed out at 23.70 times earnings. If profits were to grow by 26%, it would not be a stretch for Wall Street to value the stock at one times growth, which works out to a stock price of $322.40. Using the half-decade average P/E generates a price target of $216.88.

We can work up the income statement to get a sense of where revenue might be in 2023. In the last half decade, Deere’s average net income margin was 7.533%. In the last 12-months, the net was 8.41%. If management can hit the average profit margin in 2023, sales would be $51.6 billion. Analysts expect revenue of $28.44 billion this year and $30.86 billion next year.

In the last five-years, John Deere was valued at an average of 1.24 times revenue. At a top line of $51.6 billion in 2023, the DE shares would reach $204.12. Today, it trades close to its median on 1.3. At that level, the stock prices out at $231.99.

If Lawrence De Maria’s call on Deere & Company’s (DE) earnings is correct, then he might consider adding a 2023 price target somewhere between $204 and $217 on the conservative end and as high as $322.40 on the upper end.

At $204, shareholders would gain 10% a year plus another 1.98% for the current dividend yield for a total return a tad under 12%. At $322, the annual total return jumps to 30%.

Conclusion: Based on the William Blair report, DE investors should anticipate shares generating returns that are inline or better than the overall market in the next two to three years.