After an 8% fall year-to-date, at the current levels we believe Deere stock (NYSE: DE) has more room for growth. DE stock fell from $350 in early January to $323 now. The YTD -8% move for DE marks a significant outperformance with -23% returns for the broader S&P500 index.
Looking at the longer term, DE stock is up a solid 116% from levels seen in late 2018. This again marks an outperformance compared to some of its peers and the broader markets, with Caterpillar stock rising 52%, Cummins stock up 45%, and the S&P 500 index rising 48% over the same period.
This rise over the last three years was driven by: 1. the company’s earnings, which grew a solid 102% to $18.99 in 2021, compared to $9.39 in 2018, on a per share and adjusted basis. 2. its P/E ratio, which grew 7% to 17x currently from 16x in 2018. Earnings growth was driven by an 18% revenue growth and a 65% rise in net income margin.
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Deere’s revenue rose 18% to $44.0 billion in 2021, compared to $37.4 billion in 2018. The revenue growth was led by strong demand for construction and agriculture equipment. The company benefits from the above-average age of farming equipment in the U.S. The demand has also been buoyed by rising agricultural income. However, more recently, rising interest rates, supply chain disruptions, and a high inflationary environment are expected to weigh on revenue growth for the industrial companies.
Deere’s net income margin of 13.5% in 2021 reflects a 532 bps rise from 8.2% in 2018 due to a better pricing environment. We expect the net income margin to improve to 14.2% in 2022 as the company passes on the increased costs to the customers. Deere has spent $5.5 billion in share repurchases between 2018 and 2021, resulting in the share count falling to 314 million in 2021 from 327 million, and this trend is expected to continue over the coming years.
We estimate Deere’s valuation to be $410 per share, reflecting a 27% upside from its current market price of $323, implying that investors may be better off using the recent dip to enter DE stock for gains in the long run. Our valuation represents a forward P/E ratio of 17x based on our earnings forecast of $23.45 on a per share and adjusted basis for full-year 2022. This compares with an average of 17x seen over the last three years. That said, investors should take into account the near-term risks. DE stock faces headwinds from the current weakness in broader markets. The S&P500 has now entered a bear market territory with rising concerns of slowing economic growth given the high inflation, Fed uncertainty, and supply chain disruptions.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Corning vs. Amerco.
|S&P 500 Return||0%||-23%||84%|
|Trefis Multi-Strategy Portfolio||-10%||-27%||190%|
 Month-to-date and year-to-date as of 6/21/2022
 Cumulative total returns since the end of 2016