Deere & Company stock (DE) recently hit a new 52-week low, prompting investors to assess whether it now offers an attractive buying opportunity. While the long fall in the stock’s price is partially justified by the company’s declining revenue growth over the past few years, this pattern is not atypical for Deere due to the cyclical nature of its business model. In the meantime, the stock’s valuation appears appealing relative to future estimates. Consequently, I am bullish on Deere stock.
Deere’s Declining Revenue Is Not Alarming
Deere stock’s ongoing decline can be largely attributed to the fact that the company has been posting worsening revenue growth for nearly two years now. From Q4 of 2022 to its most recent quarter Q2 of 2024 report, Deere’s revenue growth has advanced as follows: 37.2%, 32.2%, 30.0%, 12.1%, -0.9%, -3.7%, -12.4%. It’s undeniable that Deere’s top-line performance has been disappointing, marked by a persistent trend of slowing and now declining sales.
However, it’s important to note that such periods are common for Deere due to the inherent cyclicality of its business model, which is closely tied to the agricultural and construction industries. These sectors are subject to fluctuating demand based on crop prices, weather conditions, and other economic trends.
For instance, when commodity prices decline, as seen in recent quarters, farmers typically cut back on capital expenditures for new equipment, which directly impacts Deere’s sales. The company’s Production & Precision Agriculture segment, therefore, saw its sales decline by 16% in FQ2. The Small Agriculture & Turf segment’s revenues also fell by a notable 23%.
The same logic can be followed in the construction industry. Economic downturns can lead to decreased infrastructure investments, further affecting equipment demand. In this case, that’s not exactly the issue, as infrastructure spending remains near record levels globally. Nevertheless, with huge delivery volumes taking place over the past couple of years, Deere faces tough comps. This led to a 7% decline in Deere’s Construction & Forestry sales.
Nonetheless, Deere has a long history of experiencing extended periods of both declining revenues and surging sales, such as those seen between 2020 and 2022. Therefore, the current downturn should not be cause for alarm. In fact, this extended period of declining sales may indicate that the current downcycle is nearing its end, likely to be followed by a rebound. Indeed, consensus estimates predict an 18.2% decline in Deere’s sales for FY2024, with stabilization expected in FY2025 and a return to growth anticipated in FY2026.
Profit Plunge Looks Scary, Yet the Stock Is Cheap
Deere’s declining revenues have resulted in plunging profits. However, a broader perspective suggests that the stock may be undervalued in the medium term. To elaborate, due to the nature of its business model, declines in Deere’s revenues are certain to lead to even more significant declines in its profits.
This happens because Deere has substantial fixed costs related to manufacturing and maintaining its vast dealer network. When revenues fall, these fixed costs do not decline proportionately, leading to Deere’s profit margins getting compressed. This applies vice-versa, but in this case, it means that Deere’s profits are set to plunge. Wall Street expects that EPS will land close to $25.42, implying a notable decline of 26.7%.
Assessing Deere’s valuation based solely on this year’s expected earnings could be misleading. Instead, examining forward-looking estimates provides a clearer picture of the stock’s valuation after revenue and earnings normalize. In line with Wall Street’s sales outlook, Deere’s EPS is expected to stabilize next year and return to growth in FY2026.
Currently, the stock is trading at about 14.5x 2024 and 2025’s expected EPS and 12.9x FY2026 EPS. Therefore, while the ongoing decline in revenue and earnings may appear distressing, a longer-term perspective suggests that Deere stock is attractively priced today relative to its growth prospects.
Is Deere Stock a Buy, According to Analysts?
Following Deere’s prolonged decline, Wall Street analysts have turned relatively bullish. The stock features a Moderate Buy consensus rating based on eight Buys and eight Holds assigned in the past three months. At $413.33, the average DE stock forecast implies 11.2% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell De stock, the most accurate analyst covering the stock (on a one-year timeframe) is Jamie Cook of Truist Financial, with an average return of 25.44% per rating and a 73% success rate. Click on the image below to learn more.
Final Thoughts
Despite Deere’s recent struggles with declining revenue and plunging profits, the stock likely presents a compelling bullish case near its 52-week lows. The cyclicality inherent to the company’s business model means that such downturns are common and are ultimately followed by an upswing. Given this expected future growth, the stock is now quite attractively priced for prospective investors, hence my bullish view.
