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Deere stock (NYSE: DE) currently trades at $355 per share, around 20% below its peak level of $438 seen in April 2022. In comparison, its peer – Caterpillar stock (NYSE: CAT) saw its stock rise by around 40% over the same period. DE saw its stock trading at around $300 in early June 2022, just before the Fed started increasing rates, and is currently trading 18% above that level, compared to over 47% gains for the S&P 500 during this period. This underperformance can partly be attributed to the headwinds that the company is facing from falling volumes. Returning to the pre-inflation shock level means that DE stock will have to gain more than 25% from here, and we think this will materialize over time. Our detailed analysis of Deere’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

The increase in DE stock over the recent years has been far from consistent. Returns for the stock were 27% in 2021, 25% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that DE underperformed the S&P in 2023. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector, including CAT and HON, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could DE face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, DE stock looks like it has little room for growth. We estimate Deere’s Valuation to be $382 per share, around 8% above its current market price of $355. Our forecast is based on a 15x P/E multiple for DE and expected earnings of $25.44 on a per-share basis for the full fiscal 2024. The 15x P/E ratio aligns with the stock’s average over the last five years.

2022 Inflation Shock
Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, and it is prepared for rate cuts in 2024 and 2025.

In contrast, here’s how DE stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Deere and S&P 500 Performance During 2007-08 Crisis

DE stock declined from nearly $75 in September 2007 (pre-crisis peak) to $27 in March 2009 (as the markets bottomed out), implying DE stock lost almost 65% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $54 in early 2010, rising over 2x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Deere’s Fundamentals Over Recent Years

Deere’s revenues increased sharply from $44 billion in 2021 to $61 billion in 2023, while its reported earnings per share grew from $19.29 to $35.60 over the same period. This can be attributed to a strong demand for its agricultural equipment, amid higher crop prices and an increase in farm income. However, the company likely hit its cyclical peak last year and its sales volume are now expected to enter mid-cycle levels. For perspective, Deere’s revenue of $13.6 billion in Q2’24 (fiscal ends in October) was down 15% y-o-y, with the construction and forestry segment seeing a 7% decline, while production and precision agriculture sales were down 16%, and small agriculture and turf sales fell by 23%. The company continued to benefit from a robust pricing environment, but equipment volume declined. This trend is expected to continue in the near term.

Does Deere Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Deere’s total debt increased from $48.7 billion in 2021 to $65.9 billion now, while its total cash decreased from $8.7 billion to $6.6 billion over the same period. The company reported operating cash flows of $9.7 billion in the last twelve months. At its current levels, Deere’s debt to equity ratio stands at 67%. Although the company has a reasonable cash cushion, the high debt burden is a near-term risk that the company faces.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe Deere stock has the potential for gains once fears of a potential recession are allayed. That said, falling equipment volume and farm income, high debt levels, and the impact of a cyclical fall in demand remain the key near-term risk factors. Note that the United States Department of Agriculture (USDA) expects a 25.5% y-o-y decline in net farm income, moving from $155 billion in 2023 to $116 billion in 2024.

While DE stock appears to have little room for growth, it is helpful to see how Deere’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 7/9/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.