After an 8% year-to-date decline, at current levels, we believe Deere stock (NYSE: DE) has more room for growth. DE stock has fallen from $350 in early January to $323 now. The -8% year-to-date move for DE marks a significant outperformance with returns of -23% for the broader S&P500 index.
Looking further ahead, DE stock is up 116% from levels seen at the end of 2018. This again marks an outperformance against some of its peers and broader markets, along with Caterpillar stock. up 52%, Cummins stock up 45%, and the S&P 500 index up 48% over the same period.
This increase over the past three years has been driven by: 1. the company’s earnings, which rose 102% to $18.99 in 2021 from $9.39 in 2018, per share and on an adjusted basis. 2. its P/E ratio, which increased by 7% to 17x currently from 16x in 2018. Earnings growth was driven by 18% revenue growth and a 65% increase in net profit margin.
Deere’s revenue grew 18% to $44.0 billion in 2021 from $37.4 billion in 2018. Revenue growth was driven by strong demand for construction and agricultural equipment. The company benefits from the older than average age of farm equipment in the United States. Demand was also supported by rising farm incomes. However, more recently, rising interest rates, supply chain disruptions and a strong inflationary environment are expected to weigh on earnings growth for industrial companies.
Deere’s net profit margin of 13.5% in 2021 reflects an increase of 532 basis points from 8.2% in 2018 due to an improved pricing environment. We expect net profit margin to improve to 14.2% in 2022 as the company passes on increased costs to customers. Deere spent $5.5 billion on share buybacks between 2018 and 2021, which caused the number of shares to drop to 314 million in 2021 from 327 million, and this trend is expected to continue over the next few years.
We estimate Deere’s assessment at $410 per share, reflecting a 27% rise from its current market price of $323, implying investors may be better off using the recent drop to get into DE shares for gains long-term. Our valuation represents a forward C/E ratio of 17x based on our earnings forecast of $23.45 per share and on a full-year 2022 adjusted basis. This compares to a 17x average seen over the three last years. That said, investors should consider short-term risks. DE stock faces headwinds from the current weakness in broader markets. The S&P500 has now entered bear market territory with growing concerns about slowing economic growth given high inflation, Fed uncertainty and supply chain disruptions.
While the DE stock has room for growth, it helps to see how Deere peers price on the measures that matter. You will find other useful comparisons for companies in all sectors on Peer comparisons.
In addition, the Covid-19 crisis has created many price discontinuities which can provide interesting trading opportunities. For example, you’ll be surprised how counter-intuitive stock valuation is to Corning versus Amerco.
Stock prices have fallen precipitously across all sectors over the past few months and we are now in a bear market for the first time since March 2020, when the Covid-19 outbreak triggered a stock market crash. We capture key Dow Jones trends during and after major stock market crashes in our interactive dashboard analysis,’Comparison of stock market crashes.’
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