SHANGHAI, CHINA – NOVEMBER 10: A tourist poses for a photo with a John Deere harvester during the … [+]
Deere (NYSE: DE) recently reported its Q4 fiscal 2023 results (fiscal ends in October), with revenues and earnings well above our estimates, but we believe that DE stock has only a little room for growth, as discussed below. The company reported revenue of $15.4 billion and adjusted earnings of $8.26 per share compared to the consensus estimates of $13.7 billion in sales and $7.47 earnings per share. In this note, we discuss Deere’s stock performance, key takeaways from its recent results, and valuation.
DE stock has shown strong gains of 35% from levels of $270 in early January 2021 to around $370 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-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 -14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% 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 UNP, BA, and UPS, and even for the megacap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality 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.
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 will likely see higher levels. We now estimate Deere’s Valuation to be $417 per share (versus $475 earlier), reflecting only a 12% upside from its current price of around $370. Our forecast is based on a 14x P/E multiple for DE and expected earnings of $28.75 on a per-share basis for the full fiscal 2024. The 14x P/E ratio aligns with the stock’s last three-year average. The company provided a bleak outlook for 2024, with revenues falling at least 10% for all segments and earnings estimated to be in the range of $7.75 billion and $8.25 billion, well below the consensus estimate of $9.3 billion.
Deere’s revenue of $15.4 billion in Q4 was down 1% y-o-y, as an 11% rise in construction and forestry segment sales was more than offset by a 13% fall in small agriculture and turf sales and a 6% decline in production and precision agriculture revenue. The company continued to benefit from a robust pricing environment, but agriculture equipment volume declined. Deere’s profit of $2.4 billion in Q4 2023 reflected a 5% increase from its $2.2 billion profit figure in the prior-year quarter, led by higher operating margins across segments, mainly production and precision agriculture, which saw a 300 bps y-o-y rise. The earnings per share of $8.26 was higher than the $7.44 figure in the prior year’s quarter, bolstered by a 5% fall in total shares outstanding amid share repurchases.
Looking forward, Deere expects a double-digit decline in sales for all of its manufacturing segments in 2024. This can be attributed to declining farm income. The U.S. farm income is expected to fall 25% y-o-y in 2023 after a sharp 31% rise in 2022. Deere’s business is cyclical, and its sales volume is now expected to enter mid-cycle levels after hitting a cyclical peak this year. Overall, we think that investors will likely be better off looking at other sector peers for higher gains in the long term.
While DE stock looks like it now has little room for growth, 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.
DE Return Compared With Trefis Reinforced Portfolio a
Invest with Trefis Market Beating Portfolios
See all Trefis Price Estimates
