After An 11% Fall Deere Stock Looks Undervalued

by Trefis Team
+20.23%
Upside
354
Market
425
Trefis
DE
Deere
Rate   |   votes   |   Share

[Updated: 6/11/2021] DE Stock Decline

The stock price of Deere & Company (NYSE:DE) has seen an 11% drop over the last twenty-one trading days, and we believe the stock will likely rebound in the near term. There has been no announcement from the company that may result in a correction in DE stock. That said, DE stock did see a massive 2.6x rally from levels of $151 in June last year to levels of around $394 last month. This marks a significant outperformance compared to the broader markets with the S&P500 up only 32%. This can be attributed to upbeat results over the recent quarters, improved demand outlook, and an expected rebound in the economy sooner than earlier anticipated.

Now that DE stock has seen a fall of 11% in twenty-one trading days, will it continue its downward trajectory, or is a rise imminent? Going by historical performance, there is a solid 71% chance of a rise in DE stock over the next month. Out of 97 instances in the last ten years that Deere stock saw a twenty-one day drop of 11% or more, 69 of them resulted in DE stock rising over the subsequent one month period (twenty-one trading days). This historical pattern reflects 69 out of 97, or about 71% chance of gain in DE stock over the coming month. See our analysis on Deere Stock Chances of Rise for more details.

Furthermore, going by our Deere Valuation of $425, we believe the stock, after the recent correction, is undervalued, and it can offer an upside of nearly 25% from the current levels of around $340. The company raised its full-year outlook last month on strong demand for farming equipment. The age of farming equipment in the U.S. is now above average, and the company expects to see a strong demand as farmers look at replacing the existing equipment. This clubbed with a recovery in construction demand will bode well for DE stock going forward. The recent decline offers a good entry point for long term investors to buy Deere stock.

Twenty-One Days: DE -11%, vs. S&P500 2.3%; Underperformed market

(4% likelihood event; 71% probability of rise over next 21 days)

  • Deere & company stock declined 11% the last twenty-one trading days (one month), compared to the broader market (S&P500) rise of 2.3%
  • A change of -11% or more over twenty-one trading days is a 4% likelihood event, which has occurred 97 times out of 2516 in the last 10 years
  • Of these 97 instances, the stock has seen a positive movement over the next twenty-one trading days on 69 occasions
  • This points to a 71% probability for the stock rising over the next twenty-one trading days

Ten Days: DE -4.6%, vs. S&P500 1.2%; Underperformed market

(10% likelihood event; 65% probability of rise over next 10 days)

  • Deere & company stock declined 4.6% over the last ten trading days (two weeks), compared to the broader market (S&P500) rise of 1.2%
  • A change of -4.6% or more over ten trading days is a 10% likelihood event, which has occurred 250 times out of 2516 in the last 10 years
  • Of these 250 instances, the stock has seen a positive movement over the next ten trading days on 162 occasions
  • This points to a 65% probability for the stock rising over the next ten trading days

 

[Updated: 5/24/2021] Deere Stock Update

The stock price of Deere & Company (NYSE:DE) has seen a 5% drop over the last five trading days. Much of this decline came in before the company’s earnings announcement on Friday last week. The company reported its fiscal Q2 results, which were well above the street estimates. Deere’s fiscal Q2 revenue of $11.0 billion (up 34% y-o-y) was much higher than our forecast of $10.2 billion, and the consensus estimate of $10.4 billion. This can be attributed to strong demand for both construction as well as agricultural equipment. Looking at the bottom line, Deere’s EPS of $5.68 was also well above our forecast of $4.25 and $4.52 per consensus estimates. The large bottom-line growth (up 2.7x y-o-y) can be attributed to both revenue growth as well as margin expansion, due to lower operating expenses.

Given that DE stock has fallen 5% in just five days, will it resume its downward trajectory over the coming weeks, or is a rise in the stock imminent? We believe that the stock will rebound in the near term. DE stock was up only 1% on Friday despite a strong Q2 beat. This can be attributed to the company’s management stating that it expects supply-chain issues for the remainder of the year.  That said, the company has revised its guidance upward with net income now estimated to be in the range of $5.3 and $5.7 billion, compared to earlier guidance of $4.6 to $5.0 billion. Also, using the recent trend (5% fall in a week) and ten years of historical stock data, the Trefis AI engine finds that DE stock will likely move higher over the next one month (twenty-one trading days). 

According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price using historical stock data, returns for DE stock average around 5.3% in the next one-month (twenty-one trading days) period after experiencing a 5% fall in a week (five trading days), much higher than the 3.1% expected return for the S&P500 over the next month (twenty-one trading days). More importantly, there is a good 68% probability of a positive return over the next twenty-one trading days and 60% percent probability of a positive excess return.

But how would these numbers change if you are interested in holding DE stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Deere & Company stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just one day!

Some Fun Scenarios, FAQs & Making Sense of Deere Stock Movements:

Question 1: Is the average return for Deere & company stock higher after a drop?

Answer: Consider two situations,

Case 1: Deere & company stock drops by -5% or more in a week

Case 2: Deere & company stock rises by 5% or more in a week

Is the average return for Deere & company stock higher over the subsequent month after Case 1 or Case 2?

DE stock fares better after Case 1, with an average return of 5.3% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 1.1% for Case 2.

In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as detailed in our dashboard that details the average return for the S&P 500 after a fall or rise.

Try the Trefis machine learning engine above to see for yourself how Deere & company stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold Deere & company stock, the expectation is over time the near term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

For DE stock, the returns over the next N days after a -5% change over the last 5 trading days is detailed in the table below, along with the returns for the S&P500:

Question 3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks – although DE stock appears to be an exception to this general observation.

It’s pretty powerful to test the trend for yourself for Deere & company stock by changing the inputs in the charts above.

[Updated: 5/18/2021] Deere Q2 Earnings Preview

Deere & Company (NYSE:DE) is scheduled to report its fiscal second-quarter results on Friday, May 21. We expect Deere to likely post revenues and earnings slightly below the consensus estimates. Deere is expected to benefit from improved demand for agriculture as well as construction equipment, as the economies are opening up gradually, bolstering its overall revenue growth during the quarter. Our forecast indicates that Deere’s valuation is around $384 per share, which is in-line with the current market price. Now, based on our estimates, the company will likely report numbers below the street expectations, which is likely to result in DE stock trading lower post the Q1 announcement, and that may offer a good entry point for long term investors to buy the stock. Look at our interactive dashboard analysis on Deere & Company Pre-Earnings: What To Expect in Q2? for more details.

(1) Revenues expected to be below the consensus estimate

Trefis estimates Deere’s Q2 fiscal 2021 total revenues to be around $10.2 Bil, slightly below the consensus estimate of $10.4 Bil. The company saw a strong rebound in the demand for construction as well as agriculture equipment in Q1, with revenue rising a solid 19% to $9.1 billion. The company, of late, has seen an increase in spending on agricultural equipment, primarily small tractors, and this could continue to drive the revenue growth in Q2. Deere in its previous earnings conference call provided an outlook for roughly 20% revenue growth for both Agriculture & Turf as well as Construction & Forestry segments in 2021, primarily small agriculture, which ended the year at historic lows for inventory to sales ratio, and the company expects the inventory levels to rebound in 2021. However, a high inflation due to high demand and supply constraints post the pandemic could result in increased expenses for farmers, impacting the overall spend on agricultural equipment, over the coming quarters. Our dashboard on Deere Revenues provides more details on segment-wise revenue breakup.

2) EPS likely to be below the consensus estimates

Deere’s Q2 2021 earnings per share (EPS) is expected to be $4.25 per Trefis analysis, 6% below the consensus estimate of $4.52. Deere’s net income of $1.2 billion in Q1, reflected a 137% growth from its $517 million profit in the prior year quarter, led by a decline in operating expenses. Q1 also saw a higher price realization for all the segments, aiding the overall margins, a trend which may continue in Q2 as well. Looking at the full year 2021, we expect a 70% y-o-y growth in EPS to $14.75, aided by both revenue growth as well as margin expansion.

(3) Stock price estimate in-line with the current market price

Going by our Deere & Company Valuation, with an EPS estimate of around $14.75 and P/E multiple of 26x in fiscal 2021, this translates into a price of $384, which is in-line with the current market price – $384.

Although the coronavirus outbreak has had a sizable impact on Deere’s business in fiscal 2020 due to lower demand for its equipment, the demand for both agriculture as well as construction equipment is seeing a rebound as the spread of the virus subsides, and this will result in strong revenue and earnings growth for Deere in the near term, in our view. That said, the rebound appears to be already priced in the current share value of $384, implying DE stock is fully valued at the current levels.

Note: P/E Multiples are based on Share Price at the end of the year, and reported (or expected) Adjusted Earnings for the full year

While DE stock looks fully valued, it is helpful to see how its peers stack up. DE stock comparison with its peers summarizes how Deere compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

See all Trefis Price Estimates and Download Trefis Data here

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

 

 

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!