Deere stock (NYSE: DE) has been underperforming in the market, trading at $355 per share, which is 20% below its peak in April 2022. In comparison, Caterpillar stock (NYSE: CAT) has seen a 40% increase over the same period. DE’s stock was around $300 in early June 2022 before the Fed began increasing rates, and it is now trading 18% above that level. Despite this, the stock has not been able to keep up with the S&P 500’s gains, which have been over 47% during this period. This underperformance can be attributed to the headwinds from falling volumes that the company is facing.
In recent years, DE stock has seen inconsistent returns, with a 27% increase in 2021, a 25% increase in 2022, and a 7% decrease in 2023. In comparison, the S&P 500 saw a 27% increase in 2021, a 19% decrease in 2022, and a 24% increase in 2023. It has been challenging for individual stocks, including heavyweights in the Industrials sector, to consistently beat the S&P 500 in recent years. However, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period, providing better returns with less risk.
The uncertain macroeconomic environment, with high oil prices and elevated interest rates, raises questions about DE’s future performance. From a valuation perspective, there seems to be little room for growth for DE stock. Estimates suggest a valuation of $382 per share, 8% above the current market price. This forecast is based on a 15x P/E multiple for DE and expected earnings of $25.44 per share for the full fiscal year 2024, aligning with the stock’s average over the last five years.
The timeline of the 2022 inflation shock shows a series of events that have impacted the market and influenced DE stock’s performance. Despite the current environment, there is potential for gains in DE stock once concerns about a potential recession are alleviated. However, factors such as falling equipment volume and farm income, high debt levels, and a cyclical decline in demand pose risks in the near term. The United States Department of Agriculture expects a 25.5% year-over-year decline in net farm income from 2023 to 2024.
Deere’s fundamentals have shown strong revenue growth from $44 billion in 2021 to $61 billion in 2023, with reported earnings per share increasing from $19.29 to $35.60 over the same period. However, the company is expected to reach mid-cycle levels as sales volumes decline, evident in a 15% year-over-year revenue decrease in Q2’24. Although Deere has a reasonable cash cushion and operating cash flows of $9.7 billion, its high debt burden presents a near-term risk.
Looking at Deere’s performance during the 2007-08 crisis, the company experienced a significant decline but eventually recovered. This historical context provides insights into potential outcomes for DE stock in the current market conditions. Overall, while DE stock may have limited growth prospects, assessing how Deere’s peers are performing on key metrics can provide valuable comparisons across industries.
