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A Few Recent Downgrades
Over the last few weeks, a few brokerages may lowered their ratings on DE. The most recent was Piper Jaffray, which lowered their rating from Overweight to Neutral during the second week of July. That followed an even bigger call from JP Morgan in late June. The brokerage lowered their rating from Neutral to Underweight on the stock.
Deere makes agriculture and turf equipment, and construction and forestry equipment. Its Agriculture and Turf segment provides agriculture and turf equipment, and related service parts, including tractors; loaders; combines, corn pickers, cotton and sugarcane harvesters. Deere was founded in 1837 and is headquartered in Moline, Illinois.
The company has a relatively good history of beating the number. In each of the last two quarters they were able to post a positive earnings surprise. The two quarters preceding those were another story. Two straight misses, including one with a negative earnings surprise of more than 14% takes the luster off the two recent beats.
Earnings Estimates Stuck In The Mud
Estimates for DE have declined of late. The 2013 estimates are moving lower, but not by that much. Peaking at $8.59 in April they have ticked lower to $8.52. But that is not where the real pessimism is.
The 2014 Zacks Consensus Estimate has moved lower in each month since it reached a high of $8.93 in February. The number dipped to $8.67 in May and is now down to $8.53.
The question becomes when will estimates stop falling?
The valuation picture for DE is a little mixed... with a good PE valuation and a concern over the price to book. At 10x, the multiple for both trailing and forward PE, DE compares favorably to the industry average of 14x. The 4x price to book multiple, however, is much higher than the 2.5x industry average. Price to sales is in line with the industry average. When looking at growth rates, investors would likely be concerned by a -2.5% top line growth rate in 2013 and a 0.2% increase for 2014. Similarly, EPS growth expectations of 0.2% for 2014 do not compare favorably with the 12% industry average.
The price and consensus chart really shows the story of a stock that had been a darling of Wall Street over the last few years but has recently run into trouble. The colored lines represent different years earnings estimates, and the nice 45 degree angle has not only flattened out, it has turned around. If estimates continue to decrease, the stock price will likely follow the estimates lower.
Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.
Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.
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