Over the past six months, Deere’s stock price fell to $469.54. Shareholders have lost 8.5% of their capital, which is disappointing considering the S&P 500 has climbed by 14.1%. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Deere, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Do We Think Deere Will Underperform?
Despite the more favorable entry price, we're cautious about Deere. Here are three reasons why DE doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Deere’s 4.5% annualized revenue growth over the last five years was sluggish. This fell short of our benchmark for the industrials sector.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Deere’s ROIC has decreased over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Deere’s $63.94 billion of debt exceeds the $9.69 billion of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $8.25 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Deere could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Deere can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping their customers, but in the case of Deere, we’re out. Following the recent decline, the stock trades at 27.9× forward P/E (or $469.54 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. Let us point you toward the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Deere
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