2023-12-26 11:00:03 ET
Summary
- Deere & Company's stock has been disappointing for shareholders, underperforming the S&P 500 by 33%.
- The stock is in a long-term bullish consolidation pattern, but the company is struggling from a volume perspective.
- Deere's revenue is expected to decline, and the most recent quarter showed bearish results and negative guidance for 2024.
Agriculture machinery legend Deere & Company ( DE ) has been tremendously disappointing for shareholders for nearly three years. The stock is roughly flat since early 2021, and has lost about 9% of its value this year, 33% worse than the 24% gain for the S&P 500 (SP500). The stock does, however, appear to be putting in a long-term bullish consolidation pattern, and it’s reasonably valued at the moment, so those are plus points for the bulls.
I do believe we’re going to see the company struggle from a volume perspective, though, so below, I’ll explain why I’m placing a hold on Deere. The bottom line is that I think your money deserves better and you should just look elsewhere.
First, the good news
I mentioned a bullish consolidation, and we can see that below in the weekly chart for the past four years. The COVID-driven rally that took shares from $100 to $388 has resulted in basically no returns for nearly the past three years. That hurts, but a stock like Deere essentially quadrupling means a long period of digestion is needed. On the plus side, Deere could have broken down in the past three years, but it hasn’t, and I believe that means it will eventually go higher. The problem is that I don’t see the fundamentals supporting this anytime soon. And when I say "anytime soon," I'm talking about at least 2025.
Back to the chart, we can see the triple top at roughly $440 (give or take), which has been a brick wall for the bulls. I’ve also drawn in a gradually up-sloping line that is serving as good support on the weekly chart, but if this pattern does complete, it will like take a very long time to do so, probably most or all of next year.
We do have a very nice upturn in the weekly PPO, which means the bulls are taking control back again after the recent selling, so all indications on the weekly chart are for a renewed bullish push, but with the fundamental situation the way it is, I don’t think this is good enough.
Now for the bad news
Deere has always – and probably will always – see extremely volatile results. It needs buyers of its equipment and those buyers are largely dependent upon things they cannot control, such as demand for whatever they’re producing, supply from competitors, and resulting pricing from that dynamic. That means that as the world’s agricultural producers go through boom and bust cycles (relatively speaking), so do manufacturers and services of equipment, including Deere.
Revenue flew higher from 2020 to 2023, but this year is set to see a ~14% decline in the top line. Next year isn’t looking much better, as we’ve very obviously seen the top for this cycle with fiscal 2023 results. Of course, Wall Street knew this was coming, which is why the stock peaked long before the actual peak in revenue and earnings. It is my belief that Deere shares will struggle to sustain upward momentum for the foreseeable future because of what we’ll look at now.
The most recent quarter, which was reported about a month ago, shows some very bearish results and 2024 guidance if you’re long the stock.
Production and Precision Ag – the largest segment – saw sales off 6% in the most recent quarter, but that was only because pricing remained very strong. Volumes remain weak, and price increases cannot last forever for Deere, or any other company.
We see the same sort of thing with Small Ag and Turf, but more pronounced in terms of declines.
Construction and Forestry showed the best relative performance, but volumes were still roughly flat while pricing carried the load in terms of revenue gains. The point being here that in general, revenue is already struggling in every sense of the term, and guidance for this year is pretty awful.
Production and Precision Ag is expected to see sales decline 15% to 20% this year, Small Ag and Turf is supposed to fall 10% to 15%, and even Construction and Forestry is slated to fall about 10%.
Those are massive declines and a problem in and of themselves, but they are taking margins with them. Operating margins are set to decline this year as well, and we can see the impact of that in EPS estimates below.
Sales are set to fall 14%, but EPS is likely to see an even larger decline, currently estimated to be about 18%. Operating leverage is a wonderful thing on the way up, but the “way up” for Deere ended a few quarters ago and operating leverage is not Deere’s friend right now.
The bottom line here is that Deere is in the midst of a down cycle and I see no reason to bother owning it until that changes.
Wrapping up
I see optimism for the bulls on the weekly chart, as there’s clear price support as well as improving weekly momentum. But Deere’s fundamental issues are numerous and could be relatively long-lived. With the stock having rallied recently, the Quant Rating has fallen from Strong Buy to Hold in the past month or so.
The Quant Rating has fallen two notches primarily from lower growth estimates and negative EPS revisions. In practical terms, that means the future outlook for the stock’s earnings has declined, and the valuation has worsened.
Speaking of, we have the forward P/E for the stock for the past five years to give us an idea of historical context.
I mentioned the valuation has worsened recently and it has, with the upswing in the bottom right of the chart illustrating that. To be fair, Deere & Company’s current forward P/E of 14 is quite reasonable against its historical valuations. The problem is that we know Deere is in the midst of a tough period fundamentally, so it follows that the valuation should be low. I see the stock as fairly valued here given the fundamentals, so I would not call it cheap at the moment.
With the valuation probably not providing much help to the bulls, as well as revenue and EPS plummeting this year, there’s simply no reason to bother with this one. There will come a time to own Deere, but that time is not now.
For further details see:
Deere: More Disappointment Ahead