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Deere (DE) Stock Falls 9.8% YTD: Should You Buy on the Dip?
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Deere & Company (DE - Free Report) shares have plunged 9.8% in the year-to-date period compared with the Zacks Manufacturing - Farm Equipment industry’s 8.9% decline. It has also lagged the broader Zacks Industrial Products sector’s 3.1% gain and the S&P 500’s climb of 15.0%. The manufacturer of the iconic green and yellow agricultural equipment has been grappling with elevated production costs and weak demand as farmer spending has been impacted amid low agricultural commodity prices and higher interest rates.
Deere’s Underperforms Industry, Sector & S&P YTD
Image Source: Zacks Investment Research
DE Trading Below 50-Day Moving Average
Deere shares are trading well below the 50-day moving average, indicating a bearish trend. It is also trading close to its 52-week low of $353.15.
DE Price Movement vs 50 Day Moving Average
Image Source: Zacks Investment Research
What’s Weighing Deere Down?
Weak Agricultural Demand: Deere’s net revenues and earnings per share (EPS) decreased 12% in the second quarter of fiscal 2024 attributed to lower sales volumes across all segments and higher production costs. Interest expenses also shot up due to higher average borrowing rates, as well as debt levels. Revenues in the Production & Precision Agriculture and Small Agriculture & Turf segments declined 16% and 23%, respectively, in the quarter as deteriorating agricultural commodity prices, high interest rates and production costs impacted farmer sentiment.
The impact was also evident in AGCO Corporation’s (AGCO - Free Report) first-quarter 2024 performance, with a 13% decline in sales and EPS plunging 34%. AGCO, being solely focused on farm equipment, suffered a harder blow, while Deere’s exposure to the construction sector provided some cushion. DE’s Construction & Forestry segment experienced a relatively smaller decline of 7% in the quarter. The company stated fundamentals remain stable at levels supportive of demand across most end markets.
Low Farm Income Weighs on Outlook: Despite the year-over-year decline, Deere’s earnings managed to beat expectations. However, the company trimming its guidance for two quarters in a row was not received well by investors. The company slashed its net income guidance for fiscal 2024 to around $7 billion from the prior range of $7.50-$7.75 billion. The updated projection suggests a 31% plunge from the net income of $10 billion in fiscal 2023.
Wheat, corn and soybean prices are likely to decline due to high inventory levels and expectations of an increase in supply. The U.S. Department of Agriculture projects a net farm income of $116.1 billion for 2024, indicating a decline of 25.5% from 2023. Thus, a meaningful pick up in agricultural equipment demand is not expected in the near term. Deere anticipates net sales for both Production & Precision Agriculture and Small Agriculture & Turf segments to decline in the range of 20%-25% in fiscal 2024. Its construction and forestry segment sales are expected to decrease between 5% and 10%
Costs & High Debt Levels are Concerning: Deere has been facing issues due to high costs and debt levels. Supply-chain issues led to delays in deliveries of some parts. This resulted in factories becoming less efficient lately and higher overhead spending. Efforts to downsize production have also added to overhead costs.
The company’s debt-to-capital ratio remains high at 74.3%, higher than peer Caterpillar’s (CAT - Free Report) 68.2%. Deere’s times interest earned ratio is at 4.9, lower than Caterpillar’s 9.5.
Estimates Revised Downward
Analysts seem to be losing confidence in the stock, which is evident from the downward earnings estimate revisions. Out of 14 analysts covering the stock, all have revised their earnings estimates for fiscal 2024 downward. For fiscal 2025, 12 of the 13 analysts have lowered their estimates. The forecast for fiscal 2024 and 2025 have both moved down 6.4% over the past 90 days.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for fiscal 2024 earnings for Deere is currently pegged at $25.62 per share, indicating a 26.1% year-over-year decline. The consensus mark for 2025 predicts a further dip of 2.4%.
Can Deere Jump Back?
Generating Returns Better Than Industry
DE’s trailing 12-month return on equity is 42.27%, ahead of the industry’s average of 34.34%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders’ funds in its operations to generate income.
Image Source: Zacks Investment Research
Deere’s Return on Assets is at 9.14%, ahead of the industry’s 6.68%, indicating that the company has been utilizing its assets efficiently to generate returns.
Image Source: Zacks Investment Research
Impressive Dividend Yield & Payout
Deere is currently paying a quarterly cash dividend of $1.47 per share, which translates to a payout ratio of around 16.7%, higher than the industry’s average of 14.9%. Its current dividend yield of 1.63% is higher than the S&P 500’s 1.28% and the sector’s 1.49%. Deere also outscores its peers AGCO and Lindsay Corporation’s (LNN - Free Report) dividend yield of 1.21% and 1.24%, respectively.
Over the past five years, the company raised its dividend five times, registering a five-year dividend growth rate of 17.2%. Check DE’s dividend history here.
Efforts to Lower Costs, Focus on Technology Will Bear Fruit
The company intends to cut down production volumes and manage inventory during the remainder of 2024 amid the ongoing challenges in the global agricultural and turf sectors. This will likely position the company well in the next year with low inventories. Deere recently stated that it is laying off nearly 600 workers at two factories in Iowa and Moline, IL, in an effort to lower costs.
Increased global demand for food, driven by population growth and rising standards of living, will support the demand for agricultural equipment. The U.S. agricultural machinery market is expected to witness a compound annual growth rate of 6.3% between 2024 and 2027 and reach $53.7 billion in 2027. The need to replace aging equipment will also support demand.
With farm sizes increasing, there is a greater need for labor, but escalating labor costs are prompting farmers to turn to mechanization. Deere has been continuously focused on launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Precision agriculture technology is expected to be a key catalyst. The demand for the company’s construction equipment will be supported by increased infrastructure spending.
Backed by these factors, the company has a long-term estimated earnings growth of 9.7%.
Deere Stock Not Cheap
Deere is trading at a premium with forward 12-month earnings multiple of 14.83X compared with the industry’s 12.43X. However, it is below its five-year median of 13.50X.
Image Source: Zacks Investment Research
Conclusion
Deere’s market share leadership position, investment in technology, and strong dealer network provide a competitive advantage to capitalize on the long-term demand prospects for both agricultural and construction equipment. Those who already own this Zacks Rank #3 (Hold) stock should retain it. Considering the near-term weakness in the agricultural sector and negative estimate revision activity and valuation, we believe investors should wait for a better entry point for Deere.
Image: Bigstock
Deere (DE) Stock Falls 9.8% YTD: Should You Buy on the Dip?
Deere & Company (DE - Free Report) shares have plunged 9.8% in the year-to-date period compared with the Zacks Manufacturing - Farm Equipment industry’s 8.9% decline. It has also lagged the broader Zacks Industrial Products sector’s 3.1% gain and the S&P 500’s climb of 15.0%. The manufacturer of the iconic green and yellow agricultural equipment has been grappling with elevated production costs and weak demand as farmer spending has been impacted amid low agricultural commodity prices and higher interest rates.
Deere’s Underperforms Industry, Sector & S&P YTD
DE Trading Below 50-Day Moving Average
Deere shares are trading well below the 50-day moving average, indicating a bearish trend. It is also trading close to its 52-week low of $353.15.
DE Price Movement vs 50 Day Moving Average
What’s Weighing Deere Down?
Weak Agricultural Demand: Deere’s net revenues and earnings per share (EPS) decreased 12% in the second quarter of fiscal 2024 attributed to lower sales volumes across all segments and higher production costs. Interest expenses also shot up due to higher average borrowing rates, as well as debt levels. Revenues in the Production & Precision Agriculture and Small Agriculture & Turf segments declined 16% and 23%, respectively, in the quarter as deteriorating agricultural commodity prices, high interest rates and production costs impacted farmer sentiment.
The impact was also evident in AGCO Corporation’s (AGCO - Free Report) first-quarter 2024 performance, with a 13% decline in sales and EPS plunging 34%. AGCO, being solely focused on farm equipment, suffered a harder blow, while Deere’s exposure to the construction sector provided some cushion. DE’s Construction & Forestry segment experienced a relatively smaller decline of 7% in the quarter. The company stated fundamentals remain stable at levels supportive of demand across most end markets.
Low Farm Income Weighs on Outlook: Despite the year-over-year decline, Deere’s earnings managed to beat expectations. However, the company trimming its guidance for two quarters in a row was not received well by investors. The company slashed its net income guidance for fiscal 2024 to around $7 billion from the prior range of $7.50-$7.75 billion. The updated projection suggests a 31% plunge from the net income of $10 billion in fiscal 2023.
Wheat, corn and soybean prices are likely to decline due to high inventory levels and expectations of an increase in supply. The U.S. Department of Agriculture projects a net farm income of $116.1 billion for 2024, indicating a decline of 25.5% from 2023. Thus, a meaningful pick up in agricultural equipment demand is not expected in the near term. Deere anticipates net sales for both Production & Precision Agriculture and Small Agriculture & Turf segments to decline in the range of 20%-25% in fiscal 2024. Its construction and forestry segment sales are expected to decrease between 5% and 10%
Costs & High Debt Levels are Concerning: Deere has been facing issues due to high costs and debt levels. Supply-chain issues led to delays in deliveries of some parts. This resulted in factories becoming less efficient lately and higher overhead spending. Efforts to downsize production have also added to overhead costs.
The company’s debt-to-capital ratio remains high at 74.3%, higher than peer Caterpillar’s (CAT - Free Report) 68.2%. Deere’s times interest earned ratio is at 4.9, lower than Caterpillar’s 9.5.
Estimates Revised Downward
Analysts seem to be losing confidence in the stock, which is evident from the downward earnings estimate revisions. Out of 14 analysts covering the stock, all have revised their earnings estimates for fiscal 2024 downward. For fiscal 2025, 12 of the 13 analysts have lowered their estimates. The forecast for fiscal 2024 and 2025 have both moved down 6.4% over the past 90 days.
The Zacks Consensus Estimate for fiscal 2024 earnings for Deere is currently pegged at $25.62 per share, indicating a 26.1% year-over-year decline. The consensus mark for 2025 predicts a further dip of 2.4%.
Can Deere Jump Back?
Generating Returns Better Than Industry
DE’s trailing 12-month return on equity is 42.27%, ahead of the industry’s average of 34.34%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders’ funds in its operations to generate income.
Deere’s Return on Assets is at 9.14%, ahead of the industry’s 6.68%, indicating that the company has been utilizing its assets efficiently to generate returns.
Impressive Dividend Yield & Payout
Deere is currently paying a quarterly cash dividend of $1.47 per share, which translates to a payout ratio of around 16.7%, higher than the industry’s average of 14.9%. Its current dividend yield of 1.63% is higher than the S&P 500’s 1.28% and the sector’s 1.49%. Deere also outscores its peers AGCO and Lindsay Corporation’s (LNN - Free Report) dividend yield of 1.21% and 1.24%, respectively.
Over the past five years, the company raised its dividend five times, registering a five-year dividend growth rate of 17.2%. Check DE’s dividend history here.
Efforts to Lower Costs, Focus on Technology Will Bear Fruit
The company intends to cut down production volumes and manage inventory during the remainder of 2024 amid the ongoing challenges in the global agricultural and turf sectors. This will likely position the company well in the next year with low inventories. Deere recently stated that it is laying off nearly 600 workers at two factories in Iowa and Moline, IL, in an effort to lower costs.
Increased global demand for food, driven by population growth and rising standards of living, will support the demand for agricultural equipment. The U.S. agricultural machinery market is expected to witness a compound annual growth rate of 6.3% between 2024 and 2027 and reach $53.7 billion in 2027. The need to replace aging equipment will also support demand.
With farm sizes increasing, there is a greater need for labor, but escalating labor costs are prompting farmers to turn to mechanization. Deere has been continuously focused on launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Precision agriculture technology is expected to be a key catalyst. The demand for the company’s construction equipment will be supported by increased infrastructure spending.
Backed by these factors, the company has a long-term estimated earnings growth of 9.7%.
Deere Stock Not Cheap
Deere is trading at a premium with forward 12-month earnings multiple of 14.83X compared with the industry’s 12.43X. However, it is below its five-year median of 13.50X.
Conclusion
Deere’s market share leadership position, investment in technology, and strong dealer network provide a competitive advantage to capitalize on the long-term demand prospects for both agricultural and construction equipment. Those who already own this Zacks Rank #3 (Hold) stock should retain it. Considering the near-term weakness in the agricultural sector and negative estimate revision activity and valuation, we believe investors should wait for a better entry point for Deere.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.