Over the past six months, Deere has been a great trade, beating the S&P 500 by 22.1%. Its stock price has climbed to $602, representing a healthy 28.4% increase. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Deere, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Deere Will Underperform?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons we avoid DE, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Regrettably, Deere’s sales grew at a sluggish 3.5% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.
2. EPS Barely Growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Deere’s weak 4% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Deere’s ROIC has decreased significantly 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.
Final Judgment
Deere doesn’t pass our quality test. With its shares beating the market recently, the stock trades at 29.9× forward P/E (or $602 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our top digital advertising picks.
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