Deere May Be Cheap, but Now's Not the Time to Run Toward It

NEW YORK (TheStreet) -- Going against the grain as an investor can sometimes be rewarding -- if you've placed a bet on the right stock. But doing so just for the sake of being contrarian can hurt you.

Although Deere & Co. (DE), the largest maker of farm equipment in the U.S., has become an unloved name, now's not the time to run towards trouble on the idea that the market has gotten this story wrong. So ahead of the company's fiscal second-quarter earnings results Friday, resist temptation: Leave Deere alone and move on to better investment prospects.

There's no question that Deere -- at around $89 per share -- looks incredibly cheap. It's trading at just 11 times last year's earnings of $8.63 per share. Compared to the S&P 500, which trades at an average P/E of 21, it would seem there's considerable potential in Deere. But some cheap stocks are cheap with good reason.

On a forward-looking basis, Deere is -- at best -- fairly valued, assuming it earn $5.31 per share as expected for 2015. That would put the P/E at around 17, which is in line with the broader market. And even when projecting out to fiscal year 2016, the shares are still valued at 17 times earnings. 

Again, while that's consistent with the rest of the S&P 500, it also calls for a year-over-year earnings declined of 1.6%, assuming the company does earn $5.22 per share.

So the question is, where's the value?

While the stock appears undervalued today, you'll be waiting until at least fiscal 2017 before you witness any meaningful growth. And based on the recent reductions to Deere's earnings estimates, it may take longer than that.

Consider that its estimates for the just-ended quarter were revised downward three times since it began. Earnings per share for the quarter are now expected to be $1.55, a 9% decline from the estimate of $1.71 when the quarter began. That was cut to $1.57 per share two months ago, and then again to $1.56.

Why the decline? Aside from low crop prices, Deere is suffering due to weak North American spending on high-horsepower tractors and combines -- its bread-and-butter profit producers.

Accordingly, the company has had to slash its 2015 earnings outlook. In February, management projected a 17% decline in full-year equipment revenue, and a 19% decline for the just-ended quarter. Revenue for the quarter that ended in April is expected to come in around $7.55 billion. That's also factoring in a 4% negative currency impact caused by the strong U.S. dollar.

All told, there are just too many headwinds impacting Deere's business to make this a solid contrarian play. Indeed, with Deere trading at around $89 -- $3 higher that its average analyst 12-month price target of $86 -- shares may actually still be overpriced. So regardless of how cheap Deere may appear, make the smart play and avoid Deere altogether.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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