To say that Deere & Company (DE -0.18%) has been a wonderful investment would be somewhat of an understatement. Its shares have tripled in the last five years, trouncing the 60% gain of the S&P 500. But so far in 2023, this top industrial stock is flat, seriously lagging the broader market index.
Is Deere stock a buy right now, even though the maker of agriculture machinery, heavy equipment, and lawn-care machines hasn't performed well lately? Let's consider the facts and come to an informed decision.
Outsize growth
In fiscal 2022 (ended last Oct. 30), Deere registered revenue of $52.6 billion, up 19% year over year, and this strong momentum has continued in recent quarters. The business was able to grow sales 30% in the second quarter of 2023, and it beat Wall Street estimates for revenue and earnings per share in the latest quarter.
A key to Deere's strong numbers was broad-based growth. All three of its segments (production & precision agriculture, small agriculture & turf, and construction & forestry equipment) posted double-digit sales gains, with operating margins in excess of 20%.
"Across our businesses, outperformance was driven by strong demand, favorable pricing, and operational execution enabled by supply chain improvements," Rachel Bach, manager of investor communications, said on the second-quarter earnings call.
Management is confident in Deere's near-term prospects, so it raised full-year guidance during the last earnings update. The company is now expected to bring in net income between $9.25 billion and $9.5 billion.
And over the long term, Deere is in a good position to continue posting outsize gains. With its focus on technological innovation, aimed at introducing more energy-efficient products that can help maximize crop yields, the company thinks it has added a market opportunity of $150 billion. Thanks to this Smart Industrial strategy, as it's called, Deere is ready to remain a leader in the industry.
Shareholders would not only like to see solid top-line growth, but also an expanding bottom line. Between fiscal 2017 and 2022, the company's operating margin went from 10% to 18%. If the past is any indication of the future, Deere is poised to continue that momentum.
Other notable factors
Deere is a cyclical and capital-intensive business. Demand trends are heavily influenced by the state of the economy at any given time, which makes sense because Deere sells expensive equipment.
If times are tough, farmers can hold off making purchasing decisions, pressuring sales for Deere. This could happen when commodity prices are weakening, resulting in less income for farmers to spend on high-priced machinery.
But if that simple reality doesn't scare you away, then there's still a lot to like. Deere produces consistent free cash flow that it uses to buy back shares and pay dividends, and the quarterly dividend has increased steadily over the past 20 years.
Having been around since 1837, Deere has had time to develop its economic moat, which is supported by a strong brand. Even someone who has no idea about the agriculture or construction industry has likely seen a Deere product. This brand strength is key to the success of the company, allowing the executive team to raise prices over time to combat rising costs.
After the company crushed the market in the past five years, its stock currently trades at a trailing price-to-earnings (P/E) ratio of 14.4. That's cheaper than Deere's trailing-five-year average of 19.8, and a substantial discount to the S&P 500's P/E of 20.4. This makes Deere a worthy candidate for investors looking to allocate capital to the industrial sector.
