Workday is growing market share in a $160 billion market, especially among medium-size enterprises. The company has an AI story that isn't reflected in the stock. In the third quarter, Workday saw a 30% increase in customers using one or more of its AI solutions, which include things like recruiter agents and talent optimization. AI is helping Workday customers reduce employee turnover and recruit more productively.
With strong revenue growth, margin expansion, and underappreciated AI products, we think the business will accelerate. It sets up a nice beat-and-raise story [beat earnings estimates and raise profit guidance] in 2025. We have a two-year price target of $365 for the stock, implying a multiple of 25 times forward free cash flow. The stock is $250 now.
Giroux: Workday has a roughly 25% operating profit margin, while peers have at least 35%. It should have much higher operating margins. Stock-based compensation expense is 15% of revenue. It should be much lower.
Ahlsten: My fifth recommendation is Linde, the industrial gas titan. It is a defensive, quality compounder of a company that we think can generate solid double-digit returns. Linde's stock has outperformed in eight of the past 10 market corrections.
One of the things we love about the company is that more than 60% of its sales are basically recurring revenue. It has hooked up its gas lines to customers that may have a 15-year take-or-pay agreement. Linde is one of the top three global industrial gas companies; they are essentially unregulated utilities that operate in a favorable market. Why Linde over the others? We like its leading network density, tremendous capital discipline, and relentless focus on operational excellence and innovation.
Linde stock typically trades at a big premium to the market, but right now it is trading for much closer to the market's average multiple. That is because the industrial economy has been weak lately, and Linde's volumes have been flat to down for eight straight quarters. But over that same period, Linde has increased its operating profit margin to 39% from 31%. That is all thanks to its ability to control prices and costs.
The moment the industrial economy sees a cyclical improvement, we think Linde will be a big beneficiary. The stock should enjoy some multiple expansion. We have a $553 price target in three years, implying a high-20s multiple of earnings. The stock closed Friday at $413.50.
And your last pick?
Ahlsten: It is one of my favorites: Deere. The stock was $175 when I first picked it in 2020. Now it is $422, and could go to $600 in the next three years. Gains will be driven by continued earnings growth. It is an attractive setup. Agricultural-equipment volumes are in a cyclical trough right now, and Deere is trading for a lower-than-average earnings multiple in the low 20s. Farm incomes are down 31% since 2022, as prices of corn and soybeans and other crops have declined. There are risks to farmers from both tariffs and deportations, but farm equipment still needs to be upgraded, and we think the cycle is near a bottom.
Beyond the current ag cycle, the long-term story revolves around Deere's so-called precision agriculture technology, which has seen rapid customer adoption. The number of "engaged acres" -- acres in which one of Deere's machines is active and sending data back to the John Deere Operations Center -- has increased at an 18% annual rate since 2020. It has gone from 230 million acres then to 455 million today, on which Deere is using digital tools to enhance planting, tilling, irrigation, chemical application, and much more. According to Goldman Sachs, Deere's annual precision ag revenue has gone from $1.6 billion to $5 billion in that span. Those are high-profit-margin sales. We expect this growth to continue. Deere spent almost $10 billion on R&D since 2020, widening its moat.
We see earnings rising to $35 a share by 2028. At 17 times earnings, you get a $600 stock, up from $422. Nothing runs like a Deere.
Although we are running on time for dinner. Thank you, Todd, and everyone.
-- Additional editing by Nicholas Jasinski
Write to Lauren R. Rublin at lauren.rublin@barrons.com
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(END) Dow Jones Newswires
January 24, 2025 12:27 ET (17:27 GMT)
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