Deere & Company reports its fourth-quarter earnings on Nov. 22 against the backdrop of a share price that has fallen 15% in the past four months. But could this be an opportunity to buy?
Analysts polled by Zacks Investment Research have forecast Deere & Company DE earnings per share of $7.49 for the quarter. Over the previous four quarters Deere has beaten Wall Street expectations — and by 25% in its third quarter, as reported in July.
Q3 Impressed With Raised Outlook
The green-and-yellow-liveried maker of farm and construction equipment also raised its annual profit outlook at its third-quarter presentation — saying it now expects full-year net income of between $9.75 billion and $10.00 billion, up from its previous outlook of $9.25 billion to $9.50 billion.
John May, chairman and CEO, said at the time: “Reflected by our strong third-quarter results, Deere continues to benefit from favorable market conditions and an operating environment showing further improvement.”
Yet the shares still fell.
Cyclicality: A Proxy For Economic Growth
So what’s the problem? If you’d invested in Deere & Company at the end of 2019, your shares would now be worth 140% more. And Simply Wall St says the shares are currently trading at 8.5% below their fair value estimate.
Luca Socci, an analyst at Seeking Alpha who rated the stock Buy, summed it up in one word: cyclicality. This means the stock is more exposed to the vagaries of economic growth.
“In this century alone, Deere has seen three major downturns, with revenues declining 20%-40%, together with the operating margin. Each of these downturns brought the stock down. At the same time, the stock more than recovered from each downturn, trending overall upward,” he said.
Shares in Deere’s rival Caterpillar Inc. CAT have followed in much the same trajectory: down 15% since early August, but up 68% since the end of 2019.
Is Buy And Hold The Answer?
If, as many analysts expect, the U.S. is heading into a slowdown, then even a solid set of results for Deere & Company on Wednesday may not be enough to stir the shares from their current malaise if traders believe the company is a barometer for the U.S. economy.
But investors who hold the shares long term are unlikely to be selling anytime soon, feeling that they’re likely to recover their ground and more when the economy stabilizes.