Deere (NYSE: DE) will report its Q4 2023 results on Wednesday, November 22 (fiscal ends in September) and we expect it to post revenue and earnings below the consensus estimates. There are rising concerns that the ongoing tractor boom may be nearing its end and that agriculture equipment demand may decline going forward. The U.S. farm income is also expected to decline 25% y-o-y in 2023 after seeing a sharp 31% rise in 2022. These concerns have weighed on DE stock in the recent past. Our interactive dashboard analysis of Deere’s Earnings Preview has additional details. So what are some trends likely to drive Deere’s results, and how has the company’s stock performed?
DE stock has seen extremely strong gains of 40% from levels of $270 in early January 2021 to around $380 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 -11% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 18% 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, GE, and CAT, 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? Going by valuation, DE stock looks undervalued. We estimate Deere’s valuation to be $475 per share, about 25% above the current market price of $381. At its current levels, DE stock is trading at 11x its expected forward earnings of $33.72 on a per share and adjusted basis for full-fiscal 2023, compared to the last three-year average of 14x.
Deere should continue to benefit from a strong demand environment for construction equipment, but agriculture equipment volume growth may see a decline. Furthermore, with dealer inventory levels normalizing, the overall sales are expected to decline 7% y-o-y to $13.4 billion (equipment operations) in Q4. Looking back at Q3, Deere’s revenues were up 12% to $15.8 billion. 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 the 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 construction equipment.
The company’s consolidated operating margin improved by 350 bps to 22.3%, aided by better price realization in Q3. However, the Q4 operating margin is expected to be lower sequentially partly due to higher expected R&D expenses. We expect the bottom line to be $7.32 per share in Q4, reflecting a 2% y-o-y decline. It will be interesting to see the company’s management remarks on 2024 financials. It is likely that the DE stock will react more to the 2024 guidance than its Q4 performance.
While DE stock looks undervalued, 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 Nov 2023
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