Pick Either Deere Stock Or Its Peer – Both May Offer Similar Returns

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We believe that industrial companies Deere stock (NYSE: DE) and Caterpillar stock (NYSE: CAT) will likely offer similar returns over the next three years. Although Deere is trading at a marginally higher valuation of 2.4x trailing revenues vs. 2.2x for Caterpillar, 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, with 22% gains last year, has fared better than the 16% return for Caterpillar stock and -20% returns for the broader S&P 500 index. There is more to the comparison, and in the sections below, we discuss the possible stock returns for DE and CAT in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of Deere vs. CaterpillarWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. Deere’s Revenue Growth Is Better

  • Both companies posted double-digit sales growth over the last twelve months. Still, Deere’s revenue growth of 19.4% is slightly higher than 17.0% for Caterpillar.
  • Even if we look at a longer time frame, Deere fares better, with its revenue rising at an average annual growth rate of 11.3% to $52.6 billion in fiscal 2022, compared to $39.3 billion in fiscal 2019 (fiscal ends in October). In comparison, Caterpillar’s sales declined at an average annual rate of 0.7% to $51.0 billion in 2021, vs. $54.7 billion in 2018.
  • Deere sees higher demand for agriculture equipment. The company benefits from the above-average age of farming equipment in the U.S., and the demand has also been buoyed by rising agricultural income and better price realization.
  • If we look at Q4, 2022, sales were up a stellar 59% for Production & Precision Agriculture and 26% for Small Agriculture & Turf segment. The sales growth was driven by higher volume/mix and better price realization, a trend expected to continue in the near term.
  • A better pricing environment has driven Caterpillar’s revenue growth over the recent quarters.
  • Caterpillar is also benefiting from the rise in commodity prices. Higher commodity prices translate into higher capital spending for miners, bolstering the demand for Caterpillar’s mining equipment. In fact, the resource industries was the best-performing segment for Caterpillar for the nine months ending Sep 2022, led by a high end-user demand for heavy construction and mining equipment.
  • Our Deere Revenue Comparison and Caterpillar Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, Deere’s revenue is expected to grow faster than Caterpillar’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 10.7% for Deere, compared to an 8.7% CAGR for Caterpillar, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are 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 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 But Comes At Higher Risk

  • Deere’s operating margin of 21.4% over the last twelve-month period is higher than 13.1% for Caterpillar.
  • This compares with 14.6% and 17.9% figures seen in 2019, before the pandemic, respectively.
  • Caterpillar’s free cash flow margin of 10.5% is better than 7.9% for Deere.
  • Our Deere Operating Income Comparison and Caterpillar Operating Income Comparison dashboards have more details.
  • Looking at financial risk, Caterpillar fares better. Its 3.3% debt as a percentage of equity is much lower than 40.6% for Deere, while its 7.8% cash as a percentage of assets is higher than 6.1% for the latter, implying that CAT has a better debt position and more cash cushion, making it a comparatively less risky bet.

3. The Net of It All

  • We see that Deere has demonstrated better revenue growth in recent years and is more profitable. On the other hand, Caterpillar is trading at a slightly lower valuation and comes at a lower risk.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe both Caterpillar and Deere are likely to offer similar returns over the next three years.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 14% for Deere over this period and an 11% expected return for Caterpillar, implying that investors can pick either of the two for similar returns, based on Trefis Machine Learning analysis – Deere vs. Caterpillar – which also provides more details on how we arrive at these numbers.

While DE and CAT stocks may offer similar returns over the next three years, 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 Corning vs. Amerco.

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 Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
DE Return -1% -1% 312%
CAT Return 0% 0% 158%
S&P 500 Return 0% 0% 71%
Trefis Multi-Strategy Portfolio 0% 0% 214%

[1] Month-to-date and year-to-date as of 1/4/2023
[2] Cumulative total returns since the end of 2016

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