Deere & Company
DE is set to report its first quarter fiscal 2020 financial results before the market opens on Friday, February 21. DE stock has underperformed the market recently, as trade issues and harvesting conditions have made many farmers far more cautious. What’s Wrong?
Deere, which is the world’s largest seller of farm equipment by revenue, said once again last quarter that clients have delayed their purchases amid broader industry uncertainty. Deere cut production of farm equipment by 20% over the summer to reduce inventories amid slowing global demand and it thinks U.S. farmers will remain reluctant to buy equipment after a disappointing harvest.
Despite the uncertainty, Deere’s sales climbed 4% in Q4 and 5% in fiscal 2019. This growth came on top of 2018’s 26% sales growth and marked the third-straight year of top-line growth. However, the overall sentiment remained subdued. “John Deere's performance reflected continued uncertainties in the agricultural sector," said CEO John May said in prepared remarks.
“Lingering trade tensions coupled with a year of difficult growing and harvesting conditions have caused many farmers to become cautious about making major investments in new equipment.”
Deere executive likely hoped the phase one trade deal between the U.S. and China signed in January would help renew some investor confidence. The deal is set to see China boost its purchases of U.S. agricultural goods. Yet, some on Wall Street were skeptical China could meet the purchase levels and new coronavirus setbacks hardly help the situation.
Looking back, Deere stock is up over 80% in the last five years. This outpaces Caterpillar’s (
CAT Quick Quote CAT - Free Report) 64% climb and its industry’s 68%, which includes Titan International, Inc. TWI, Alamo Group Inc. ALG, and Briggs & Stratton Corporation BGG. But investors can see how volatile the last two years have been.
On the valuation side, DE stock is trading at 16.9X forward 12-month Zacks earnings estimates. This marks a discount compared to its own five-year median, its industry’s 19.1X, and the S&P 500. Deere also currently pays a quarterly dividend of $0.76 per share, for a yield of 1.81% at the moment, which tops the 10-year U.S. treasury’s 1.5%.
Looking ahead, our Zacks estimates call for Deer’s Q1 revenue to fall 10.6% from the year-ago period to $6.2 billion. Meanwhile, its full-year fiscal 2020 sales are expected to slip 7.5%. The farm equipment firm is then projected to see its 2021 revenue climb 4.2% above our current year estimate.
At the bottom end, DE’s adjusted earnings are projected to fall 15.5% to $1.30 per share. Overall, Deere’s fiscal 2020 EPS figure is expected to sink 5% lower. Then its adjusted 2021 earnings are projected to climb 13.3% above our current year estimate.
The nearby chart helps show investors just how much worse Deere’s earnings picture has turned over the last 90 days, with its current year consensus estimate down 15%. This downward trend helps Deere hold a Zacks Rank #4 (Sell) heading into its earnings release. And DE has come up short of our earnings estimates in six out of the last seven quarters.
DE’s Manufacturing - Farm Equipment industry also rests in the bottom 21% of our more than 250 Zacks industries. Therefore, it might be best to stay away from Deere stock for now, as it looks more like a trader’s stock than an investment, especially given its up and down nature over the last several years.
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