Should You Buy Deere Stock After A 10% Fall In A Week Despite Solid Q3?

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Deere stock (NYSE: DE) dropped 10% in a week despite a Q3 beat in performance and improved guidance. We believe the selling in Deere is overdone, and investors will likely be better off buying this dip for reasonable gains in the long run.

Interestingly, DE stock had a Sharpe Ratio of 0.8 since early 2017, higher than 0.6 for the S&P 500 Index over the same period. Still, it falls short of the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.

Deere’s revenues were up 12% to $15.8 billion in fiscal Q3’23 (fiscal ends in October). The equipment revenue stood at $14.3 billion compared to the consensus estimate of $14.1 billion. This growth was driven by a 12% rise in Production & Precision Agriculture segment and a 14% rise in Construction & Forestry segment revenue. This can be attributed to better price realization and strong demand trends for farming and construction equipment.

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The company’s consolidated operating margin improved by 350 bps to 22.3%, aided by better price realization. The earnings of $10.20 on a per share basis were up 66% from $6.16 in the prior-year quarter, and this was well above the consensus estimate of $8.21. The rise in earnings can be attributed to higher sales and improved operating margins.

Not only did Deere exceed the street expectations in Q3, but it also raised its full-year outlook. It now expects its fiscal 2023 net income to be between $9.75 billion and $10 billion, vs. its prior forecast of $9.25 billion to $9.50 billion. It also raised its Construction & Forestry segment sales forecast from 15% growth earlier to 15%-20% growth now. So, why did the stock decline? Investors are likely in consensus about 2023 being a record year for Deere, but they seem to be worried about the company’s future growth. The investors are concerned that the ongoing tractor boom may be nearing its end and that agriculture equipment demand may decline going forward. Note that the U.S. farm income is expected to decline in the mid-teens in 2023. [1] Still, farmers are upgrading machinery despite the crop-price slump. Deere may see tepid volume growth for its agricultural equipment in fiscal 2024. That said, after its recent correction, DE stock appears attractive from a valuation perspective.

We have updated our model to reflect the latest quarterly performance and expect the company to post sales of $55.3 billion (equipment operations) and adjusted EPS of $32.50 in fiscal 2023. We believe that Deere will continue to benefit from a robust demand environment, margin expansion, and strong price realization. Looking at the stock price, we estimate Deere’s Valuation to be $475 per share, about 21% above the current market price of $391. At its current levels, DE stock is trading at 12x its expected forward earnings of $32.50 on a per share and adjusted basis for full-fiscal 2023, compared to the last three-year average of 14x, implying ample room for growth.

While DE stock looks like it can see higher levels, 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.

Returns Aug 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 DE Return -9% -9% 279%
 S&P 500 Return -4% 15% 97%
 Trefis Reinforced Value Portfolio -6% 28% 558%

[1] Month-to-date and year-to-date as of 8/22/2023
[2] Cumulative total returns since the end of 2016

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Notes:
  1. 2023 Farm Sector Income Forecast, Feb 7, 2023, U.S. Department of  Agriculture []