Over the past year, this agriculture and heavy equipment manufacturer has underperformed; its shares have declined 15% while the broad market has dropped 9%, observes John Eade of Argus Research.
In fact, the long-term performance of Deere (DE) against the market has been weak, as the stock has declined 16% over the past five years while the S&P 500 (SPX) has advanced 46%.
As a global manufacturing company, Deere is affected by trends in exchange rates and commodities. We think both currency and commodities may be near inflection points.
Given the currency and commodity trends, Deere’s earnings have been consistently declining for several quarters.
The longer-term drop in global commodity prices has sent farm income plummeting in the US.
In 2015, US net cash farm income was $91 billion, according to the US Department of Agriculture, down more than 25% from its peak of $123.7 billion two years ago.
The USDA’s forecast for 2016 calls for net cash farm income to drop another 3% to $88 billion.
We think the DE shares are attractively valued at current prices near $77. Over the past 52 weeks, the shares have traded between $70-$98.
From a technical standpoint, the shares have traded in a fairly tight band of $83-$72 since August; they are currently in the middle of that band.
On the fundamentals, the shares appear attractively valued at 17.8 times our 2017 fiscal year EPS estimate, compared to a 21-year historical average range of 13-24.
It is important to keep in mind, also, that current EPS represents the low end of historical margins.
In addition, on valuation, they are trading at a price/cash flow multiple of 6.7, below the low end of the historical range of 8.4-18.2, and at a price/sales multiple of 0.9, below the midpoint of the range of 0.8-1.1.
We are raising our rating on Deere to a buy. We think margins are near all time low levels and will rebound over the next two-to-three years as conditions improve.
This well managed company’s stock is now trading near attractive valuation levels. Our 12-month target price is $85.
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