Is It The Right Time To Buy Deere & Company After A 12% Fall?

Despite a 36% rise since the March 23 lows of this year, at the current price near $150 per share, we believe Deere & Company’s stock (NYSE: DE) has more room for growth. Deere’s stock has rallied from $111 to $151 off the recent bottom, compared to the S&P 500, which grew 34%.

Deere’s stock has partially reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential, as it will benefit from the recovery in oil prices, as well as the gradual opening up of economies, which will aid the demand for its equipment. Also, its valuation implies it has further room to grow.

Interestingly, Deere stock hasn’t seen any growth over the recent years, and it is up a mere 1% from the levels seen in early 2018, a little over 2 years ago, compared to a 12% growth for the S&P 500. This underperformance comes despite the fact that the company’s revenues have grown by about 32% between 2017 and 2019, with net margins also expanding from 7.3% to 8.3% over the same period.

While the company has seen steady revenue and earnings growth over recent years, its PE multiple has actually declined, explaining the underperformance. We believe the stock is likely to see significant upside despite the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard, What Factors Drove 1% Change In Deere & Company Stock?, provides the key numbers behind our thinking, and we explain more below.

Deere’s PE multiple changed from 22x in 2017 to 17x in 2019. While the company ‘s PE is now 15x there is an upside opportunity, when the current PE is compared to levels seen in the past years. PE of 22x end of 2017 and 20x as recent as late 2018.

So what’s the likely trigger and timing for further upside?

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity.  The U.S. economy contracted by close to 5% in Q1 and is expected to see a sharper decline in Q2. Deere is likely to see lower demand for its construction equipment. Construction activity is expected to be sluggish in 2020, due to lockdowns in several cities. Other than construction, the company’s farming equipment is also expected to face headwinds in 2020, given the decline in consumer spending, which will likely impact the agricultural produce pricing. Moreover, restaurants buying of agricultural produce has declined owing to the health crisis. Significantly low oil prices have reduced demand for ethanol as well. With farmers’ income being impacted, the demand for Deere’s farming equipment will also take a hit. We believe Deere’s Q2 results in July will confirm the hit to its revenue. That said, we believe the long-term outlook for the company remains robust making the stock attractive at current levels (with the PE at its lowest levels in the last 4 years). Economies are gradually opening up, and oil prices have already staged a strong recovery over the recent weeks. These factors could bode well for Deere, especially going into Q3.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. 

Is industrial behemoth General Electric, down 40% this year, a better bet than Emerson Electric? Find out in our dashboard analysis What Factors Drove General Electric Stock Between 2018 And Now?

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