What happened
Shares of Deere & Company (DE -0.18%) have significantly outperformed the broader markets over the past five years, but at least one analyst is concerned that the momentum might be about to fade. Shares of Deere traded down as much as 2.9% on Tuesday after the stock received a downgrade from Evercore ISI (EVR 0.35%).
So what
Deere has been on an impressive run of late. The manufacturer of agriculture and construction equipment has enjoyed a strong upgrade cycle in its core markets. That in turn has fueled a 168% gain in the stock over the past five years, more than three times what the S&P 500 has delivered.
Evercore analyst David Raso believes things get harder from here. The analyst downgraded Deere shares to perform in line with the S&P from outperform and cut his price target to $424, from $456. Raso sees potential for revenue weakness in the final months of the year.
Farm equipment production schedules are falling in Europe and Brazil, according to Raso. With retail demand expected to fall in 2024, it will likely be difficult for Deere to enjoy robust investment in new equipment.
Now what
Deere looks like a long-term winner with impressive products and a strong reputation for research into next-generation technologies, but management can do nothing to escape the cyclical nature of its end markets. Farmers tend to invest when times are good and hold back when budgets are tight, instead of buying at a steady cadence.
For long-term holders who believe in Deere, the cycle is nothing to fear. The downgrade does not suggest anything is wrong with the core business. But if Raso is correct, the coming quarters could be turbulent, and investors should brace themselves for potential headwinds.
