DE - Deere: Position Yourself Now For The Eventual Recovery

2024-05-25 09:14:44 ET

Summary

• Deere & Co shares have underperformed over the past two years amid declining US and global farm conditions with farm income and crop prices falling from record heights.
• While Ag vehicle destocking continues, stabilizing crop prices and healthy farm balance sheets should provide support in the downturn and retain sales declines to 2024 and 2025.
• With a cycle-bottom next year, I estimate Deere 25E revenues will be down ~20% vs 2023 cycle-high, around the same as in historical downturns.
• Spread between trailing and forward multiples is currently widest since 2017 with NTM P/E 23% above LTM P/E and indicates potential for ~80% price return over the next 24 months.
• I initiate shares at Overweight with a YE24 price target of $475 based on 26E EPS as I estimate investors will soon reset their focus beyond the current downturn.

Deere & Co ( DE ), the world's largest manufacturer of heavy agricultural machinery such as tractors and combine harvesters, recently reported its Q2 earnings . On the back of a cyclical downturn in agricultural end markets from 2022 highs, reported sales were down 12% YoY with net income and EPS dropping 17% and 12% respectively. Now forecasting a stronger than initially expected downcycle, management also cut its full year earnings guidance for a second time by 8%. As a result of both missing street estimates and the lowered guidance, shares dropped by up to 5%, adding to Deere's recent underperformance vs the broader market. Since mid-2021 shares have traded essentially flat while the S&P 500, largely driven by technology, has gained 26%. ...

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