Deere Stock: Buy, Hold, or Sell? | DE Stock Analysis

SUMMARY

Parkev Tatevosian, CFA, reviews Deere & Company's recent performance and valuation, concluding that the stock is now best rated as a hold after years of recommending it as a buy. He notes the company's cyclical nature, current valuation metrics, and dividend yield in his analysis.

MAIN POINTS

• Deere & Company stock has risen over 76% in the past five years, prompting a reassessment of its investment potential. [0:00]
• The company benefits from strong construction spending and commodity prices but faces challenges from trade barriers and declining operating profit margins. [1:01]
• Return on invested capital has dropped to 5.25%, and the dividend yield of 1% is less attractive compared to government bonds and money market accounts. [2:00]
• Deere's forward price-to-earnings ratio is 27.5, near historical highs, and the stock appears fairly valued by discounted cash flow analysis but slightly overvalued by other measures. [3:01]
• The recommendation is downgraded to hold, with a suggestion to wait for a 10% pullback before considering additional purchases. [4:01]
• Viewers are invited to share their experiences and opinions on Deere's stock performance in the comments. [5:00]

DETAILED ANALYSIS

Deere & Company has delivered substantial returns for investors, with its stock appreciating over 76% in the past five years and more than 34% year-to-date. This strong performance is attributed to favorable macroeconomic factors such as increased construction spending and rising commodity prices. However, the company's manufacturing base outside the United States has exposed it to heightened trade barriers, which, along with cyclical industry dynamics, have contributed to a decline in operating profit margins from a peak of 25% to 20.5%.

Over the long term, profit margins have shown an upward trend, but recent quarters have seen a marked reduction in returns on invested capital, now at 5.25%, significantly below the company's weighted average cost of capital. This unfavorable ROIC to WACC ratio signals that recent capital allocation has not generated sufficient returns.

For income-focused investors, Deere's dividend yield stands at just 1%, which is notably lower than the yields available from 10-year government bonds and money market accounts, both offering returns above 4%. While equities offer the potential for capital appreciation, the current dividend yield diminishes Deere's appeal as a pure income investment. The stock's valuation has also become stretched, with a forward price-to-earnings ratio of 27.5—among the highest in recent years.

Discounted cash flow analysis places Deere's intrinsic value at $635 per share, close to the current market price of $625, indicating that the stock is fairly valued by this metric but slightly overvalued when considering other valuation methods.

Given these factors, the accumulation phase for Deere appears to be over. The recommendation shifts from buy to hold, with a medium conviction level. Investors are advised to wait for a pullback of at least 10% before considering additional purchases, reflecting a cautious outlook amid strong past performance and current valuation concerns.

LINKS

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