By Al Root

Among corn farmers, "knee high by the Fourth of July" means that the crop will be a strong one. The same applies to Deere stock, whose rally is only getting started.

Deere has been enjoying a long planting season. From 2021 through 2024, the stock narrowly lagged behind the S&P 500, returning 13.5% a year to the index's 13.6%. It wasn't that anything was fundamentally wrong with the company: Deere was still the dominant agricultural equipment maker, with an artificial-intelligence kicker to boot.

The farm cycle hasn't helped. U.S. farm income decreased to about $139 billion in 2024, down from a record $182 billion in 2022, as benchmark corn prices went from a peak of $8 per bushel to less than $4 over that span. As farmers suffered, Deere struggled to keep up.

But after a cold winter, investors have been warming up to shares of Deere. The stock has gained nearly 20% since the start of 2025 and shows no signs of slowing down. The fundamentals of the company still look remarkably strong, and AI will allow it to do what it's always done -- make more money while helping farmers make more money. But with the farm cycle beginning to turn -- and strength in its Brazil operations to help offset weakness if it doesn't -- shares of Deere look ready for their next leg of outperformance.

"The market does not fully appreciate how good Deere's competitive moat is," says Melius Research analyst Rob Wertheimer, who has a Buy rating on the stock.

Few doubt the potential for AI to revolutionize farming -- and for Deere to be at the forefront of that revolution. Precision farming, as AI-enabled agriculture is known, uses technology to get more with less. Deere's tools, for instance, can help farmers place seeds more precisely, which helps improve crop yields, while using AI field diagnostics to know where fertilizers and pesticides are needed.

The potential is enormous. U.S. corn yield per acre has more than doubled over the past 40 years, and there is room to keep growing. The average U.S. acre yields about 180 bushels of corn, well below the record for dry land, which is around 450 bushels. If AI helps boost crop yield by 20% annually, it would be worth some $13 billion to U.S. farmers, based on average corn prices. Deere's goal is to take a small cut of that extra profit through higher prices or subscription-like revenue for AI applications.

There is also an opportunity outside of the U.S. Brazil, the one country able to add agricultural production at scale, presents a massive opportunity, according to Raymond James analyst Tim Thein. Because of its climate, Brazil has the advantage of having two substantial crop seasons a year versus just one in Europe and the U.S.

Deere has taken advantage. Thein estimates that Deere's market share has doubled over the past 15 years, helped by the company's localized production and its Brazilian dealership network, which operates more than 275 stores in the region. "We see this region becoming a bigger revenue/earnings contributor to DE within the next few years," writes Thein, who has an Outperform rating on Deere stock.

The combination of precision farming and Brazil means Deere earnings could grow earnings faster than the 15% average annual growth generated across the past few agricultural cycles. Now the cycle just needs to cooperate. During fallow times, farmers purchase less equipment, and that is exactly what has happened: Deere's revenue is expected to hit $38.3 billion in fiscal year 2025, which ends in October, down 31% from $55.6 billion generated in fiscal year 2023.

Deere's recent strength -- it's gained 35% over the past 12 months -- suggests that investors are sniffing out a recovery, with U.S. grain inventories relatively low, a good indicator of higher, or stable, prices in the future. Wall Street sees recovery, too, with sales projected to grow by 7% in fiscal 2026 and 11% in 2027.

Not everyone sees a turn happening in the near future. While acknowledging Deere's leadership position and management's solid execution, Hightower Advisors Chief Investment Strategist Stephanie Link argues that tariffs, elevated inventories, and weak demand have pressured sales and earnings. She doesn't own the stock.

Nor is Deere stock, at 25 times 12-month forward earnings, exactly cheap. Shares typically trade at 90% of the S&P 500's multiple, which implies shares should be trading for about 21 times earnings right now. Valuations for cyclical companies, however, get tricky. Investors typically pay high multiples when they think earnings are near their trough, and lower multiples when they believe earnings are peaking.

Wall Street expects Deere's earnings to be closer to $19 a share for fiscal year 2025, down from $35 in fiscal 2023 . But they are expected to bounce back to $30 a share in earnings by fiscal year 2027 or 2028, and that would be enough to justify a $600 stock price over the coming 12 months, up almost 20% from Tuesday's close of $503.47. Wertheimer, for his part, has a two-year target of $750 a share, up nearly 50% from recent levels.

The seeds are planted. Now it's time to buy Deere stock.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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July 16, 2025 01:00 ET (05:00 GMT)

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