Don't Buy Deere Stock -- It's Not as Cheap as It Seems
Deere (DE) - Get Report , the world's largest maker of agriculture farming equipment, will report fourth-quarter fiscal 2015 earnings results before the opening bell Wednesday. Owing to weakness in its North American agricultural unit, the 178-year-old company earlier this year slashed its 2015 earnings outlook. As it stands, full-year earnings per share are projected to decline almost 40% year over year.
Accordingly, Deere stock has been punished, falling 14% in 2015 and more than 18% in the past six months, trailing the S&P 500 (SPX) during both spans. And if you've held Deere shares over the past year or three years, you're likely in the hole by about 13% and 10%, respectively.
Even though the Moline, Ill.-based company expects to remain profitable in both 2015 and 2016, Deere stock is not as cheaply valued as its decline would indicate.
Sure, Deere shares trade at just 14 times fiscal 2015 estimates of $5.44. They look cheap. The company's forward price-to-earnings ratio is three points lower than that of the average stock in the S&P 500. But based on fiscal 2016 consensus estimates of $4.33 in earnings per share, Deere's earnings are projected to decline 20% year over year.
Assuming Deere does earn $4.33 for 2016, the shares are still valued at 18 times those estimates -- one point higher than the S&P 500. It doesn't make sense to buy a seemingly cheap stock whose earnings are projected to decline.
Not only is the company suffering from weak sales in its high-horsepower tractors and combines, Deere must also overcome low prices of crops and the negative currency impact of the strong dollar that devalues its sales in overseas markets.
In its fiscal third quarter, for instance, a 24% revenue decline in its Agriculture & Turf business hurt Deere's net sales, which plummeted 20% year over year to $7.6 billion. And with revenue in its Construction & Forestry business falling some 13% year over year, there were no offsetting factors to help stem the tide. That's likely going to be the case again Wednesday.
For the quarter that ended in October, analysts on average expect Deere to earn 75 cents a share on revenue of $6.15 billion, translating to year-over-year declines of 64% and 23%, respectively. For the full year, earnings are projected to decline 37% year over year to $5.44 a share, while revenue of $26.32 billion would mark of decline of 20% year over year.
To its credit, Deere has beaten Wall Street's earnings estimates in six straight quarters, even amid all these struggles. This is a testament to the effectiveness of its management team, which has reduced the company's headcount to adjust for weaker sales and profits.
Still, without a catalyst to increase profits, Deere stock will remain under pressure and investors would be better served to stay away.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.