There is a cautious tone across Wall Street heading into the end of the year. While stock prices have been on the rise over the past four weeks, company guidance trends are very gloomy. FactSet reports there is about a 2:1 ratio of earnings downgrades to upgrades over the earnings season that just wrapped up. Deere & Co. (DE, Financial) was one such company issuing a dour outlook for 2024.
Still, I see the stock as undervalued today given its low earnings multiple, and I will outline key price levels to watch on the chart to use for possible value opportunities over the coming weeks.
64 companies issuing negative guidance, 32 positive
Source: FactSet
Company description and risks
According to Bank of America Global Research, Deere is a leading multinational and best-in-class farm equipment operator. It has four primary segments: Production and Precision Agriculture, Small Agriculture and Turf, Construction and Forestry and Financial Services. With a widening competitive advantage in precision agriculture products, margins and pricing power improvements are expected, which should lead to market share gains over the coming years. A key risk is the cyclical nature of the ag production industry and farm equipment orders – a 2024 slowdown in global economic growth could hurt the company. Upside risk comes from a pickup in overall capital expenditure activity and ongoing infrastructure spending.
Key data
With a $110 billion market cap, the Illinois-based agriculture and farm machinery company operates within the industrials sector. It trades at a low 11.8 forward non-GAAP price-earnings ratio and pays a near-market 1.40% dividend yield as of Nov. 22. Following disappointing earnings results, shares trade with a low 20% implied volatility percentage, and the stock carries a modest short interest of 1.10%.
Earnings Review
In November, Deere reported fourth-quarter earnings per share of $8.26, topping the Wall Street consensus estimate by 85 cents. Revenue also verified above expectations at $15.4 billion, a 1% decrease from year-ago levels, but $1.75 billion ahead of estimates. The management team issued 2024 net income attributable to Deere & Company guidance in the range of $7.75 billion to $8.25 billion. It appeared to be a decent operating quarter, but shares fell more than 3% on the 22nd due to the bleak profit outlook. Deere's focus on mining and energy activities over farming underscores the reality that North American large ag is likely to see material weakness next year, with a possible 25% drop off in farming volume as discretionary spending softens.
While finishing significantly off the lows of the day, Deere sees weaker net earnings over the next several quarters. The 2024 guide compares weaker to $10.17 billion in 2023 net income as sales volumes revert to mid-cycle levels. The consensus profit figure was $9.3 billion. Still, Bank of America notes that next year's earnings per share should still be the company's second-strongest earnings year in its history.
Valuation
On valuation, analysts at Bank of America see earnings falling sharply in 2024 before per-share profits climb back in 2025 and 2026. The current consensus outlook calls for $31.32 in non-GAAP earings this year and $31.84 in the out year, while sales may dip more than 10% in 2024. Dividends, meanwhile, are expected to rise at a fast pace over the coming quarters, helping to drive the yield higher should the stock price hold steady. With high free cash flow, shareholder accretive activities should persist while its enterprise value/Ebitda multiple is significantly below the broader market's average
Deere's five-year historical non-GAAP forward price-earnings ratio has averaged about 18 and the sector median is above 17. If we apply a more modest 14 multiple given weaker growth prospects noted earlier and assume normalized earnings of $30 per share, then the stock should trade near $420. I assert the current 11.3 forward non-GAAP earnings multiple is priced too pessimistically. Should a severe slowdown be averted, then the valuation case is compelling.
Deere: Earnings, valuation, dividend yield and free cash flow forecasts
Source: BofA Global Research
Competitor analysis
Compared to its peers, Deere features a middle-of-the-road valuation as other agriculture companies struggle with a similar slowing of the global macro landscape. Deere's solid growth history is a relative tailwind, but uncertainty is high heading into 2024. Still, with high profitability and robust free cash flow, the company is an industry leader when it comes to turning profits. Share price momentum has been soft, though, and there could be further risks should sellside analysts come out bearish on out-year projections before the next earnings date.
Event outlook
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed first-quarter 2024 earnings date of Friday, Feb. 16. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
Source: Wall Street Horizon
The technical take
Deere has frustrated the bulls over the past two years. Notice in the chart below that shares put in a triple-top pattern with key resistance at the $450 mark. Sellers first came about at that level during the bull market in commodities back in the second quarter of 2022, and the late-year rally several months thereafter was another top. Then this past August's broad market rebound was still not enough to bust the stock through resistance. So as long as Deere is under that level, it is hard to be overly bullish from a technical perspective.
Still, I spot a pair of important support points that could offer a value opportunity. First is the May low of $345 and the second is the $320 to $329 zone. The high amount of volume by price that bases around $320 leads me to assert that an ample number of buyers should step up in the low to mid-$300s. Concerning me, however, is that the stock may be breaking an uptrend support line off the July 2022 low. For now, with a long-term 200-day moving average that is negatively sloped, the bears are more in control than the bulls. On the bright side, the relative strength index momentum oscillator is printing higher lows, indicating some positive divergence as price drifts lower.
Overall, the chart is not all that compelling from either a bullish or bearish point of view. Support is seen lower on the chart while a breakout above $450 would be a long-term positive signal.
$450 triple top in play, $345 and $325 support points, improving RSI trends
Source: Stockcharts.com
The bottom line
I see about 13% fundamental upside to Deere's stock price. The technicals and momentum are less compelling, though, and buying on a dip to around $325 could set up a better risk-reward.
