With a history that traces back more than 185 years, farming equipment and machinery stalwart Deere (DE +0.41%) is closely identified with the agricultural industry. Few companies can boast such lengthy histories as Deere, suggesting that it's a business with real staying power and a stock that could bolster investors' portfolios.
But there's some disagreement about the best way to look at Deere's stock. While some expect an investment in Deere would bear fruit, others are more skeptical about its prospects from here. To help make better sense of the different perspectives, two fool.com contributors weigh in on both sides of the argument.
Deere's incredible run is looking a little long in the tooth
Lee Samaha: Deere is a great company, and it has excellent long-term growth prospects thanks in part to the productivity benefits created by its equipment and precision agriculture solutions. In addition, its construction and forestry segment has substantial exposure to infrastructure spending due to its extensive range of road construction machinery. Its long-term future looks great, but the near-term situation is more concerning.
NYSE: DE
Key Data Points
First, two analysts have downgraded the stock recently, with Evercore analyst David Raso concerned about weaker conditions in Europe and Brazil. Meanwhile, Canaccord analyst Bobby Burleson is worried about slowing agricultural equipment sales, which have been causing rising dealer inventory levels -- suggesting fewer orders from Deere.
In addition, the prices of key crops like corn, soybean, wheat, and cotton are down over the last year. (Wheat and corn are down more than 30% over the period.) Lower crop prices will pressure farmers' incomes, and in turn, pressure their spending on Deere's equipment. Moreover, given the strong run in Deere's equipment sales over the last few years, it might be time for farmers to slow down their purchases, particularly given that higher interest rates have made it more expensive to buy or lease equipment.
Adding all these factors together suggests a challenging near-term outlook for Deere, which means now might not be the best time to buy into the stock.
With shares on sale, now's a great time to harvest shares of Deere
Scott Levine: Undeniably, there are concerns related to the near-term factors that are putting pressure on Deere's business, but given the company's long and successful history, this is not its first rodeo.
The connection between falling commodity prices and farmers' enthusiasm for purchasing new equipment is understandable. It's imperative to remember, though, that this is a cyclical phenomenon. Crop prices may tumble -- as they have in the past -- but they won't stay down forever. Of course, Deere's successes in the past don't ensure similar successes in the future, but it's certainly worth noting how resilient the company has been over the past few decades despite some ups and downs.
Prospective investors want to feel confident that management will be adept at turning investments into profits. In fact, the return on equity metric is one of Warren Buffett's favorite ways to gauge a company's proficiency.
DE Return on Equity (5y Mean) data by YCharts.
Looking at Deere's five-year average return on equity, investors can see that over the past 30 years, Deere has achieved overall improvements in its ability to churn profits out of shareholders' investments -- an encouraging sign that its current challenges are temporary and won't likely impede the company from long-term success.
Currently, forward-looking investors have a great opportunity to reap the benefit of low market enthusiasm for Deere's stock. Shares are changing hands at 11.3 times trailing earnings, a discount to their five-year average price-to-earnings ratio of 19.7.
Is Deere a smart choice to cultivate a winning portfolio?
While there are debates about whether Deere's stock is a glass that's half full or half empty at the moment, it's fair to say that there are valid arguments being made by both camps. Nonetheless, those who are committed to holding Deere stock through the current volatility may be rewarded in time for their patience. Those with shorter investing horizons, though, may find another industrial sector stock to be a more appealing choice right now.
