After Jumping 2X In 3 Years, Does Deere’s Stock Still Have Room For Growth?

Deere (NYSE:DE) is one of the largest manufacturers of agriculture equipment in the world. Deere’s stock has more than doubled in value in the last three years – increasing from under $80 per share in early 2016 to around $160 now – thanks to a combination of improved margins, upbeat global sentiment and strong revenue growth. Moreover, improved U.S. farm cash receipts have aided the demand for the company’s products. Trefis highlights the reasons for Deere’s Share Price Increase over recent years in an interactive dashboard along with our forecast for full-year 2019. We estimate Deere’s valuation to be $168 per share – leaving little upside potential for investors. You can modify any of our key drivers to gauge the impact of changes on the company. Additionally, you can see all Trefis Industrial Data here

Deere’s Stock Has Outperformed Major Price Indices Over Recent Years

• Deere’s stock price has increased from $77 at the beginning of 2016 to around $160 now. This translates to a growth of more than 100%.
• Deere has comfortably outperformed major indices such as S&P 500 and Dow Jones Industrial Average.
• Over the same period, Dow Jones Industrial Average grew by 57% while S&P 500 could manage a growth of roughly 50%.

Why Has Deere’s Stock Outperformed?

We break down change in Deere’s stock into 4 factors: Deere’ s Stock Price = Revenue x Margins x Earnings Multiple / No. of Shares

• Deere’ shares have gained primarily from an increase in Revenues and P/E multiple as well as marginal increase in net income margin (62 bps)
• The increase in valuation was mitigated partially by an increase in share count.

 #1 Deere Has Witnessed Strong Revenue Growth Post 2016

• After sliding 8% in 2016, Deere’s revenues jumped by more than $10 billion over the next 2 years at an average annual rate of 18.4%.
• Agriculture and Turf Equipment has been the largest growth driver, adding $4.7 billion to total revenues – contributing roughly 62% to the total revenue growth.
• Construction and Forestry Equipment segment has been the company’s fastest-growing segment over recent years, adding more than $5 billion in revenues since 2016, primarily driven by the acquisition of Wirtgen and higher shipment volumes

#2 Deere’s Agricultural & Turf Equipment Revenue Seems To Be Moving In Tandem With U.S. Farm Cash Receipts

• Since Deere derives roughly 90% of its equipment operations revenues from U.S. & Canada, Deere’s revenue is dependent upon the U.S. farm cash receipts (FCR).
• There is an evident positive correlation between U.S. FCR and Deere’s Agricultural & Turf equipment revenues. Since 2016, both these metrics have achieved steady growth.
• That said, Deere’s revenue growth has comfortably outpaced growth in US FCR due to replacement demand.
• Strong replacement demand in agricultural markets, has helped Deere to achieve robust growth in Agricultural & Turf equipment revenues

#3 Deere’s Total Expenses As % of Total Revenue Have Marginally Declined

• Although Deere’s expenses, led by Wirtgen acquisition, have increased sharply since 2016, revenue growth has comfortably outpaced growth in expenses.
• As a result, Deere’s total expenses as % of revenue have slightly declined from 91.7% in 2016 to around 89% in 2018.
• Lower R&D and SG&A expenses have primarily contributed to this decline in total expenses

#4. Strong Revenue Growth Has Boosted The Company’s Bottom Line 

• Net profit has gone up from $1.5 billion in 2016 to more than $2.4 billion in 2018. This growth can be primarily attributed to increased revenues across all operating divisions.
• This has helped the EPS figure improve from $4.81 in 2016 to $7.24 in 2018 despite the marginal negative impact of an increase in number of stock

 #5. Deere’s P/E Ratio Has Also Increased Steadily

• Deere’s P/E Ratio has steadily increased from 17.7x in 2016 to around 20.6x in 2018-providing a boost to the company’s stock price.
• However, our estimate for the company’s P/E multiple for 2019 is lower at 16.1x – indicating a fair price estimate of $168 for Deere’s stock.

 Conclusion: Deere’s Stock Looks Fairly Priced Based On Our Forecasts For Revenues and Profits In 2019

• Deere has good underlying demand from the replacement cycle and take-up of its technological solutions in agricultural equipment, while construction demand also remains good.
• Moreover, demand for replacement equipment has been accompanied by farmers’ willingness to invest in technologies that enhance operational efficiencies and produce tangible economic results.
• In addition, demand for construction and forestry equipment is likely to remain upbeat, to be driven by strong growth in housing demand. This should further support the demand for Deere’s products and in-turn its stock price movement in the near term
• We value the company at about 16x projected FY’19 EPS –lower than its current trading multiple of 17x, but higher than the industry-average trading multiple of 11.5x.

Based on our forecast, Deere’s adjusted EPS for fiscal 2019 is likely to be around $10.44. Using this figure with our estimated P/E ratio of 16x, this works out to a price estimate of $168 for Deere’s stock, which is slightly ahead of the current market price.

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs

For CFOs and Finance Teams | Product, R&D, and Marketing Teams

All Trefis Data

Like our charts? Explore example interactive dashboards and create your own.