35% Downside For Deere Stock?

Despite a 20% decline in Deere’s (NYSE: DE) stock since the beginning of the year, at the current price of around $140, Deere’s stock could see a significant downside, due to the impact of the coronavirus and oil price war crisis. Deere’s stock is still 8% lower than what it was since the start of 2018, a little over two years ago. Our dashboard, ‘Deere & Company Downside: How Low Can Deere & Company Stock Go?‘ provides the key numbers behind our thinking, and we explain more below.

A significant contributor to Deere’s stock price decline over the last two years has been the contraction of its P/E multiple, which on a trailing basis, declined from about 22x at the end of 2017 to 17x at the end of 2019, and 13.5x currently. The company’s business was impacted by the trends in the farming sector in 2019. Record rainfall, and flooding in Mississippi, were some of the factors that resulted in 19.4 million acres of unplanted cropland in 2019. This directly impacted Deere’s business as well, resulting in 5% products sales growth in 2019, as compared to 29% and 11% in 2018 and 2017, respectively. Though 12% of sales growth in 2018 can be attributed to the Wirtgen acquisition. While the company managed to post strong 40% earnings growth on the back of improved margins, which drove Deere’s stock price higher in 2019, its valuation multiple declined.

So what’s the likely trigger and timing to this downside?

The current coronavirus crisis will likely have a significant impact on Deere’s business, 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. It is estimated that more than 20 million people in the U.S. have lost their jobs over the past few 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. As such, investors could revise their expectations for the full-year revenue to be closer to $31.4 billion, about 6% higher than its 2017 revenue of $29.7 billion, and 20% lower than the 2019 revenue of $39.3 billion. The market isn’t going to stomach this well, and Deere’s P/E multiple could shrink by about 20% from 17x in 2019 to 13.5x in 2020. This would mean a double whammy of 35% lower earnings and 20% lower P/E multiple, translating into Deere’s price drop of over 35%, to about $90 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse over the next few quarters, and as the coronavirus crisis is tamed during late fiscal Q3 or early Q4, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture and complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies, including Union Pacific and Adobe. The complete set of coronavirus impact and timing analyses is available here.

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