Deere & Company (DE) has long been a stalwart in the agriculture and construction equipment industry, consistently delivering a strong financial performance and maintaining a solid market position. However, the company’s recent earnings report has stirred up some market concerns, leading to a notable dip in its stock price. Despite beating analysts’ expectations on both the top and bottom lines, Deere’s decision to cut its full-year profit guidance has spooked investors.
Given this backdrop, it’s crucial to examine the underlying factors that contributed to Deere’s guidance cut and assess whether the stock’s recent downturn is an overreaction or a justified recalibration of market expectations.
In this analysis, we’ll explore the company’s financials, valuation, options market sentiment, future growth prospects, and analyst coverage to determine if the post-earnings dip is a potential buying opportunity, or a signal for caution.
About Deere & Company Stock
Founded in 1837, Deere & Company (DE) manufactures and distributes agricultural, construction, forestry, and commercial equipment, along with providing replacement parts for its products and those of other manufacturers. The company also offers product and parts financing services, extending its reach globally.
Valued at about $107.5 billion, Deere stock has lost 5.2% on a year-to-date basis, underperforming the broader market.
Recent News for DE Stock
On May 14, Skechers (SKX) and John Deere revealed a collaboration to expand the work, outdoor, and fashion industries worldwide through a jointly branded professional and lifestyle product line. The footwear collection, set to debut in July 2024, caters to agricultural professionals, construction workers, outdoor enthusiasts, and trendsetters alike.
On March 25, Deere & Company announced the appointment of Kellye Walker, a former executive at Eastman Chemical Company (EMN), to its leadership team as the Senior Vice President, Chief Legal Officer, and Worldwide Public Affairs Officer, effective April 29.
Deere Stock Falls on Guidance Cut
Most critically, on May 16, Deere & Company reported its fiscal Q2 earnings results. Net sales and revenues fell 12.4% year-over-year to $15.24 billion in the second quarter, but still exceeded the consensus estimate by $1.92 billion. The drop in net sales was due to factors like reduced shipment volumes, although this was partially offset by price realization efforts in most segments.
When examining the company’s performance by segment, sales in production and precision agriculture decreased by 16% year-over-year to $6.58 billion, primarily due to reduced shipment volumes, although partially offset by price realization. Also, small agriculture and turf sales declined by 23% year-over-year to $3.19 billion on reduced shipment volumes, also partially offset by price realization.
Finally, construction and forestry sales fell 7% year-over-year to $3.84 billion, primarily due to lower shipment volumes. “In construction and forestry, fundamentals remained stable at levels supportive of demand across most end markets,” Josh Rohleder, Manager of Investor Communications, said during the earnings call.
Deere’s net income dropped 17% year-over-year to $2.370 billion in the second quarter, or $8.53 per share, yet exceeded analysts’ expectations by $0.61. It is important to note that despite the challenging macro environment, the company maintained relatively strong operating margins of 25.1%, thanks to efficient cost management strategies implemented across all business segments.
Per the company’s earnings call, the global agricultural and turf markets are projected to see a persistent decline in farmer sentiment, influenced by various factors such as rising global inventories, declining commodity prices, elevated interest rates, and weather volatility.
When it comes to the company’s outlook, management anticipates a decline in net sales ranging between 20% and 25% for the full year within the production and precision agriculture segment. Also, the small agriculture and turf segment is projected to experience a decrease in net sales ranging between 20% and 25% in fiscal 2024, while 2024 net sales in the construction and forestry segment are expected to decrease by 5% to 10%.
As a result, the company revised its full-year guidance, saying it now anticipates net income of approximately $7 billion, compared to the previous range of $7.5 billion to $7.75 billion. Investors responded unfavorably to the revised guidance, causing the stock to drop by more than 4%.
Analysts tracking the company project a year-over-year decline of -24.8% in its profit to $26.01 per share for fiscal 2024, alongside an anticipated revenue decrease of 16.09% year-over-year to $46.62 billion. In fiscal 2025, the company’s profit is projected to remain largely unchanged from the previous year before rebounding in fiscal 2026.
DE Stock Valuation and Dividend Yield
As for the valuation of Deere & Company, the stock is currently trading at around 15x the consensus earnings estimate for 2024, which marks a discount to both the sector median of 19.23x and the stock’s own five-year average of 17.69x.
On May 8, Deere paid its shareholders a quarterly dividend of $1.47 per share. The company offers an annualized dividend of $5.88 per share for a dividend yield of 1.52%, which is slightly higher than the sector median of 1.43%. Notably, the company’s payout ratio stands at 16.41%, reflecting a conservative stance on dividend allocation - which permits reinvestment in the business and provides a buffer against market downturns.
Options Market Sentiment on Deere & Company Stock
Analyzing the June 21, 2024, option chain for DE, let's gauge options market sentiment by examining the open interest levels.
At the $380 strike price, which is closest to the current share price, the put/call ratio stands at 4.15, suggesting a stronger inclination towards put options and indicating a bearish sentiment in the options market toward DE stock.
What Do Analysts Expect For DE Stock?
Analysts have a consensus rating of “Moderate Buy” on Deere stock. Out of the 22 analysts covering DE stock, 12 analysts recommend a “Strong Buy,” one advises a “Moderate Buy” rating, and nine give a “Hold” rating.
The mean target price for DE stock is $430.38, which indicates an upside potential of about 13.4% from current levels.
The Bottom Line on DE Right Now
While the company’s long-term growth potential appears favorable, it’s essential to consider that its short-term performance can be affected by fluctuations in crop prices, construction expenditures, and economic conditions. The company’s recent earnings setbacks and downward revisions in guidance reflect the prevailing challenges it is currently encountering. Consequently, I believe investors should refrain from purchasing the stock following the post-earnings dip.
On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
