Deere & Company (DE 0.94%) stock came close to eclipsing its previous all-time high last month after the industrial company reported better-than-expected results for its fiscal 2023 first quarter and raised its guidance for the full fiscal year.
However, the stock has sold off since then along with the broader market. Let's look at the company's most recently reported quarter -- including its balance sheet, dividend, spending, and valuation -- to determine if Deere is a good buy now.
Image source: Getty Images.
A phenomenal quarter
For the quarter, which ended Jan. 29, net sales were up 34% year over year, net income more than doubled from $903 million to $1.96 billion, and diluted earnings per share pole-vaulted by 124% to $6.55.
The company also raised its fiscal 2023 net income forecast from a prior range of $8 billion-$8.5 billion to a new estimated range of $8.75 billion-$9.25 billion. The company expects net operating cash flow from equipment operations to be between $9.25 billion and $9.75 billion.
Though it has been experiencing weakness in Asia and Europe, Deere remains confident that it will be able to implement further sizable price hikes, just as it did in fiscal 2021 and 2022. Deere has been successful in growing order volumes despite higher prices. Management noted that inventories remain low and customer demand is strong.
The strength of the agriculture price index points to relatively high corn, wheat, and soybean prices, though these commodities are down from their recent peaks.
It's worth noting that in 2022, Deere stock initially fell in lockstep with the index's slump. But Deere has since surged back toward all-time highs even as the agriculture price index has kept declining -- a testament to Deere's brand power and the strength of its customer base.
Even though the index is down around 14% from its all-time high, it is still up by around 30% over the last five years. Sustained higher crop prices cause food inflation. But at the same time, these higher crop prices directly benefit farmers -- and, in turn, Deere.
Financial strength
Deere's total net long-term debt is at an all-time high. But that's because Deere is a far larger business today than it was just five or 10 years ago.
DE Net Total Long Term Debt (Quarterly) data by YCharts.
In fact, the company's debt-to-capital and financial-debt-to-equity ratios are both at 10-year lows, which illustrates that the company isn't overly leveraged and has a healthy capital structure.
Returning value, increasing spending
Deere management has repeatedly said that it prioritizes operational performance and long-term growth over the dividend or share buybacks. Even so, it has doubled the dividend in the last five years, and decreased its outstanding share count by 8.4%. The reason the dividend yield is just 1.2% is mostly due to the rapidly rising stock price. Had Deere stock been flat over the last three years, its yield would be closer to 3%.
Just as Deere's debt levels have gone up, so too has its spending. Deere expects selling, general, and administrative (SG&A) expenses to rise by 16% in fiscal 2023 and research and development (R&D) spending to increase by 14%. Yet despite those increases, the cost of goods sold remains by far the most dominant spending category for Deere.
DE Revenue (Annual) data by YCharts.
And even though SG&A and R&D outlays are on the rise, they are growing at a slower rate than the cost of goods sold -- which shows that Deere isn't being overly aggressive with its spending. In fact, Deere is in a great position because it can support a growing dividend and buybacks, plus higher spending across the board without hurting its balance sheet.
If Deere grows its R&D budget by 14% in fiscal 2023, it would exceed $2 billion annually for the first time ever. It's a costly endeavor, but Deere values R&D because it believes in the adoption of artificial intelligence (AI) and autonomous tractors to improve efficiency and lower costs for its customers. Few companies have $2 billion a year lying around to spend on R&D. If Deere keeps investing wisely, it stands a good chance to take advantage of this industry evolution if and when it occurs.
A not-so-cheap valuation
As impressive as Deere's performance is, the stock isn't cheap. Deere's price-to-cash-flow-from-operations ratio and price-to-book-value ratio are above their 10-year medians. And its price-to-earnings ratio is close to the 10-year median.
DE PE Ratio data by YCharts.
With Deere's earnings and cash flow from operations at all-time highs, we would normally expect these ratios to be below their averages. The issue is that Deere's stock price has surged so much.
An excellent company, but the stock isn't a screaming buy
Deere is a classic example of a company that is doing just about everything right, but its stock price already reflects that fact. It isn't a good value stock because it isn't inexpensive. And it's not a particularly compelling dividend stock because its yield is too low.
Rather, Deere is a cyclical stock undergoing explosive growth due to factors both outside and within its control. It has a multi-decade growth runway and the potential to transform its industry. But it remains to be seen how receptive its customers will be to AI and automation.
Add it all up, and Deere seems to be a stock worth watching or maybe opening a starter position in. But there's no reason to go out and buy the stock hand over fist at this time.
