Is Deere Stock Fully Valued At $400?

DE: Deere logo

Deere (NYSE: DE) recently reported its Q2 fiscal 2024 results (fiscal ends in October), with revenues and earnings exceeding the street estimates. The company reported equipment revenue of $13.6 billion and earnings of $8.53 per share, compared to the consensus estimates of $13.3 billion and $7.86, respectively. However, the company provided a bleak outlook, with net income now expected to be around $7 billion, compared to its prior outlook of $7.5 billion – $7.75 billion. It should be noted that the previous outlook provided by Deere also reflected a cut in its full-year guidance. The recent cut in earnings guidance didn’t sit well with the investors, and its stock fell around 5% on Thursday, May 16. Despite its recent fall, we think that DE stock is fully priced. In this note, we discuss Deere’s stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at Deere’s stock performance in recent years. DE stock has seen strong gains of 45% from levels of $270 in early January 2021 to around $395 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. However, the increase in DE stock has been far from consistent. Returns for the stock were 27% in 2021, 25% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that DE underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and UNP, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DE face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, DE stock looks like it is appropriately priced. We now estimate Deere’s Valuation to be $382 per share, close to its current market price of $395. Our forecast is based on a 15x P/E multiple for DE and expected earnings of $25.44 on a per-share basis for the full fiscal 2024. The 15x P/E ratio aligns with the stock’s average over the last five years.

Deere’s revenue of $13.6 billion in Q2 was down 15% y-o-y, with the construction and forestry segment seeing a 7% decline, while production and precision agriculture sales were down 16%, and small agriculture and turf sales fell by 23%. The company continued to benefit from a robust pricing environment, but equipment volume declined. Deere’s profit of $2.4 billion in Q2’24 reflected a 17% fall from its $2.9 billion profit figure in the prior-year quarter, led by lower operating margins across segments. The earnings per share of $8.53 was lower than the $9.65 figure in the prior year’s quarter, partly aided by a 6% fall in total shares outstanding amid share repurchases.

Looking forward, the company expects a decline in sales for all of its manufacturing segments in 2024. Deere’s business is cyclical, and its sales volume is expected to enter mid-cycle levels after hitting a cyclical peak last year. Deere may continue to face headwinds in the near term, amid falling commodity prices and elevated interest rates.

While DE stock looks like it is fully valued, 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 May 2024
MTD [1]
YTD [1]
Total [2]
 DE Return 1% -1% 283%
 S&P 500 Return 5% 11% 137%
 Trefis Reinforced Value Portfolio 6% 6% 650%

[1] Returns as of 5/17/2024
[2] Cumulative total returns since the end of 2016

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