Should You Pick Deere Stock At $360 After 6% Fall In A Week Amid Downbeat Outlook?

Deere (NYSE: DE) reported its Q1 fiscal 2024 results (fiscal ends in October) last week, with revenues and earnings well above the street estimates. The company reported equipment revenue of $10.9 billion and earnings of $6.23 per share compared to the consensus estimates of $10.4 billion and $5.21, respectively. However, the company provided a bleak outlook, with net income now expected to be between $7.5 billion and $7.75 billion, compared to its earlier outlook of $7.75 billion to $8.25 billion. The consensus estimate for profit stood at around $8.0 billion. It should be noted that the previous outlook provided by Deere also fell short of the over $9 billion consensus estimate. The recent cut in earnings guidance didn’t sit well with the investors and its stock fell around 7% over the last week or so. After its recent fall, we think that DE stock has some room for growth. In this note, we discuss Deere’s stock performance, key takeaways from its recent results, and valuation.

DE stock has shown strong gains of 30% from levels of $270 in early January 2021 to around $355 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the increase in DE stock has been far from consistent. Returns for the stock were 27% in 2021, 25% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that DE underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DE face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, DE stock looks like it has some room for growth. We now estimate Deere’s Valuation to be $402 per share, reflecting a 12% upside from its current price of around $357. Our forecast is based on a 15x P/E multiple for DE and expected earnings of $27.27 on a per-share basis for the full fiscal 2024. The 15x P/E ratio aligns with the stock’s average over the last five years.

Deere’s revenue of $10.9 billion in Q1 was down 7% y-o-y, with the construction and forestry segment seeing no growth, while production and precision agriculture sales were down 7% and small agriculture and turf sales fell by 19%. The company continued to benefit from a robust pricing environment, but equipment volume declined. Deere’s profit of $1.75 billion in Q1’24 reflected an 11% fall from its $1.96 billion profit figure in the prior-year quarter, led by lower operating margins across segments. The earnings per share of $6.23 was lower than the $6.55 figure in the prior year’s quarter, bolstered by a 6% fall in total shares outstanding amid share repurchases.

Looking forward, the company expects a decline in sales for all of its manufacturing segments in 2024. Deere’s business is cyclical, and its sales volume is expected to enter mid-cycle levels after hitting a cyclical peak last year. Although we think that DE stock has some room for growth, other sector peers may offer better gains in the long term.

While DE stock looks like it has some room for growth, it is helpful to see how Deere’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 2/22/2024
[2] Cumulative total returns since the end of 2016

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