Solid Growth Prospects Make Deere Stock A Better Pick Over This Industrial Company

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We believe that Deere stock (NYSE: DE) is currently a better pick than Terex stock (NYSE: TEX), an aerial work platforms and materials processing machinery manufacturer, given its better prospects. Although Deere stock is trading at a comparatively higher valuation of 2.1x trailing revenues vs. 0.5x for Terex, this gap in the valuation is justified given Deere’s superior revenue growth and profitability, as discussed below.

If we look at stock returns, Deere, despite a 0% rise year-to-date, has outperformed Terex, down 29%, and the broader markets, with the S&P500 index falling 23%. There is more to the comparison, and in the sections below, we discuss why we believe DE stock will offer better returns than TEX stock in the next three years. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis of Deere vs. TerexWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Deere Revenue Growth Has Been Better Over Recent Years

  • Both companies saw double-digit sales growth over the last twelve months. Still, Terex’s revenue grew slightly faster at 17.6%, compared to 14.0% for Deere.
  • However, if we look at a longer time frame, Deere has fared better. Its sales grew at an average annual rate of 6.5% to $44.0 billion in 2021, compared to $37.4 billion in 2018, while the average rate for Terex stood at -2.2%, resulting in revenue falling to $3.9 billion in 2021, compared to $4.5 billion in 2018.
  • Deere saw a strong rebound in demand for construction and agriculture equipment over the last year or so. 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, things have changed for equipment manufacturers over the last few months. The inflationary pressure, rising interest rates, a strengthening dollar, and slowing economic growth are likely to weigh on the top-line growth for Deere.
  • For Terex, the revenue growth over the recent years was impacted by Covid-19, which weighed on demand for aerial work platforms (elevating work platforms).
  • Terex has seen a rebound in demand for aerial work platforms, materials processing equipment, concrete mixer trucks, and cranes over the last year or so, a trend expected to continue in the near term.
  • Our Deere Revenue and Terex Revenue dashboards provide more insight into the companies’ sales.
  • Looking forward, Deere’s revenue is expected to grow faster than Terex’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 10.5% for Deere, compared to a 3.9% CAGR for Terex, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Deere Is More Profitable

  • Deere’s operating margin of 20.1% over the last twelve months is much better than 9.0% for Terex.
  • This compares with 17.9% and 9.7% figures seen in 2019, before the pandemic, respectively.
  • Deere’s free cash flow margin of 7.9% is better than 1.1% for Terex.
  • Our Deere Operating Income and Terex Operating Income dashboards have more details.
  • Looking at financial risk, Terex is placed better. Its 39.0% debt as a percentage of equity is lower than 49.0% for Deere, while its 8.5% cash as a percentage of assets is higher than 5.8% for the latter, implying that Terex has a better debt position and more cash cushion.

3. The Net of It All

  • We see that Deere has demonstrated better revenue growth over the recent years and is more profitable. On the other hand, Terex has a better debt position and cash cushion, and it is trading at a comparatively lower valuation.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Deere is currently the better choice of the two, despite its higher valuation.
  • The table below summarizes our revenue and return expectations for Deere and Terex over the next three years and points to an expected return of 17% for Deere over this period vs. a 7% expected return for Terex, implying that investors are better off buying DE over TEX, based on Trefis Machine Learning analysis – Deere vs. Terex – which also provides more details on how we arrive at these numbers.

While DE stock looks like it can outperform TEX stock, it is helpful to see how Deere’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for UniFirst vs. Deere.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Oct 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
DE Return 3% 0% 234%
TEX Return 4% -29% -2%
S&P 500 Return 3% -23% 64%
Trefis Multi-Strategy Portfolio 3% -24% 199%

[1] Month-to-date and year-to-date as of 10/4/2022
[2] Cumulative total returns since the end of 2016

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