Can Caterpillar Outperform Deere After A 17% Fall?

by Trefis Team
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The industrial companies have not been immune to the current coronavirus crisis, and they have fared much worse than the broader markets. While Caterpillar (NYSE:CAT) has declined -17.2% since early February, after the WHO declared the coronavirus a global health emergency, Deere & Company (NYSE:DE) stock has lost -15.7% over the same period. Even from the March 23 lows, S&P 500 recovered 27%, while Caterpillar and Deere recovered 17% and 20%, respectively. We believe that Caterpillar stock will likely outperform Deere’s stock over the coming months. Our conclusion is based on our detailed dashboard analysis, ‘After A -17% Move Is Caterpillar Expensive Or Cheap vs. Deere & Company?‘, wherein we compare trends in key metrics for the two industrial giants to determine their relative valuations under the current circumstances. We summarize parts of this analysis below.

What’s Impacting The Performance of Caterpillar And Deere’s Stocks Over Recent Weeks?

Caterpillar’s stock decline over the recent weeks can be attributed to fears of recession in the global economy, and the impact of the current crisis on Caterpillar’s business, especially the demand related to the oil & gas industry. The oil price war led by Saudi Arabia has resulted in more than a 60% plunge in benchmark oil prices, with WTI down from $61 toward the beginning of the year to under $23 levels currently (as of May 4). Lower oil prices will likely result in lower U.S. oil production, thereby impacting the requirement of new equipment as well as servicing. This will likely result in lower dealer inventory levels for Caterpillar. Note that roughly half of the company’s total sales are generated from the North America region, and the U.S. has become the epicenter of the crisis. Moreover, the coronavirus outbreak has forced various governments to impose lockdowns, which will likely result in reduction of mining activities in the near term. Equipment relating to mining as well as construction will also see lower sales in the near term.

Deere, on the other hand, could see a significant impact on its sales due to an overall decline in farming, and construction activities. Farmers currently face labor issues, volatility in crop prices, and logistics related concerns. Construction activity is expected to be sluggish in 2020, due to lockdown in several states. In fact, March housing starts plunged 22% from a month earlier, and April could be even worse. More than 30 million people in the U.S. have lost their jobs over the past six weeks, due to the ongoing coronavirus impact. As a result, consumer spending is on a decline, and with the global economy feared to go into recession, it will likely have a significant impact on Deere’s direct sales.

Caterpillar’s current P/E multiple, based on 2019 earnings, has declined from 13.1x in 2019 to 9.7x currently, while Deere’s multiple has declined from 17.6x to about 13.4x. Deere’s multiple appears high, compared to Caterpillar, and it is slightly higher than the low levels of 12.5x seen in 2015, implying that the stock could be vulnerable. Even going beyond the current health crisis, when the restriction on movement of people is eased, the economic repercussions will likely have a significant impact on both the companies’ businesses.

Overall, while both the stocks could continue to underperform the broader markets, it’s likely that Caterpillar stock will outperform Deere going forward, which could see more correction to its P/E multiple through the current crisis. We believe that the ground reality for Deere will likely be confirmed during its next couple of quarterly results.

CORONAVIRUS CRISIS : Since early February, Caterpillar stock has moved -17.2% compared to -15.7% for Deere

  • Caterpillar’s stock has declined by about -17% since early February, compared to -16% decline for Deere, after the WHO declared a global health emergency relating to coronavirus.
  • Caterpillar’s stock declined -26% while Deere’s stock is down -23% since beginning of the year.
  • From the March 23 lows, the S&P 500 recovered 27%, while Caterpillar and Deere recovered 17% and 20%, respectively.

ANALYSIS: Is Caterpillar stock expensive based on a review of the fundamentals?

  • P/E Ratio: Based on trailing 2019 P/E ratios, CAT stock looks attractive compared to prior years, and attractive compared to Deere & Company. Caterpillar 2019 trailing P/E ratio of 13.1 is 0.7x that of the 2019 Deere & Company P/E ratio of 17.6.. P/E Ratio is calculated based on year end market price and trailing adjusted earnings. However, for 2020 P/E, we use 2019 adjusted earnings and current market price.
  • Historical Revenue Growth: Caterpillar 2015-19 annualized revenue growth of 3.4% is lower than that of the 2015-19 Deere & Company’s annualized revenue growth rate of 8.0%. The U.S. trade tensions weighed on the sales of both the companies in 2019.
  • Historical EPS Growth: Caterpillar 2015-19 annualized adjusted EPS growth of 19.9% is 1.4x that of the 2015-19 Deere & Company annualized adjusted EPS growth rate of 14.6%.
  • Total Debt Comparisons: Caterpillar Total Debt has increased from $29.5 billion to $32.5 billion between 2016 and 2019. In comparison, Total Debt for Deere & Company has risen from $30.6 billion to $41.0 billion.

Given the current pandemic, and the global economy feared to go into recession, could it take Johnson Controls Stock Back To $20?

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

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