Deere: Harvesting Gains for 120 Years

06/20/2017 2:54 am EST


John Eade

Chairman and CEO, Argus Research Group

Deere (DE) is a well-managed company with a stock that is still trading at attractive valuations despite a recent run higher, notes John Eade, analyst with Argus Research.

Deere & Co., along with its subsidiaries, operates in three segments: Agriculture & Turf, Construction & Forestry, and Financial Services. 

The company markets its products primarily through independent retail dealer networks and retail outlets. Deere & Co. was founded in 1837 and is headquartered in Moline, Illinois.

DE shares have outperformed over the past quarter, rising 11% while the S&P 500 has gained 2%. Over the past year, they have also outperformed, advancing 52% while the broad market has gained 15%.

This cyclical stock has underperformed over the past five years, but has outperformed over the past 120. The beta on DE shares is 0.68.

As a global manufacturing company, Deere is affected by trends in exchange rates and commodity prices. We think that both currency and commodities have passed inflection points and are in improving trends.

Given challenging conditions, Deere’s earnings have been steadily declining for several quarters. But we think margins are near all-time lows and expect them to rebound over the next 2-3 years as conditions improve and management focuses on controlling costs.

Based on current sales and margin trends, as well as management’s guidance, we are raising our FY17 diluted EPS estimate to $6.25 from $4.75. Our estimate implies a 30% increase from FY16.

Our estimate also implies a net margin of 7.3%, well below the company’s five-year average of 8.3% and not far from the 10-year low of 4.2% — suggesting room for improvement over the next several years. We are also raising our FY18 EPS estimate to $7.00 from $5.45. Our long-term earnings growth rate forecast is 7%.

We think that DE shares are attractively valued at current prices near $122, toward the high end of the 52-week range of $76-$123. From a technical standpoint, the shares have been in a bullish trend of higher highs and higher lows that dates to January 2016.

On a fundamental basis, the shares appear attractively valued at 17-times our FY18 EPS estimate, compared to a 20-year historical average range of 13-24. It is important to keep in mind that current EPS estimates correspond to the low end of the historical margin range.

Our 12-month target price is $140, up from $120 Our revised target price assumes a P/E of 20-times next year’s earnings, which is still below the high end of the range.

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