Deere Stock Drops 27%: What Long-Term Investors Should Know About the Recent Earnings Report

Moline, Illinois – Deere & Co, the world’s largest manufacturer of heavy agricultural machinery like tractors and combine harvesters, recently released its Q2 earnings report. The sales declined by 12% Year over Year, while net income and EPS dropped by 17% and 12% respectively due to a cyclical downturn in agricultural end markets from the 2022 highs. As a result of missing street estimates and lowered guidance, shares dropped by up to 5%, reflecting Deere’s recent underperformance compared to the broader market. The company cut its full-year earnings guidance for a second time by 8%.

Investors see the recent underperformance as an opportunity to invest in Deere for the long term, as several indicators suggest a cycle-bottom in 2025E. The company’s strong history of cash allocation is expected to support EPS over the period. Despite potential weakness in shares during the downcycle, recent sideways trading and valuations present an attractive risk/reward profile. Historical data shows that at current levels of divergence between trailing and forward multiples, Deere shares have historically performed well over the next 24 months, gaining an average of 80%.

Analysts forecast a price target of $475/sh for YE24 based on 26E EPS, suggesting that investors will soon view Deere shares favorably. Potential risks to this forecast include a stronger-than-expected downturn in agricultural machinery end markets, declining farm fundamentals, and less favorable crop price developments. John Deere & Co. operates in four segments: Production & Precision Ag, Small Ag and Turf, Construction & Forestry, and Financial Services.

The company is expected to manage demand weakness by producing less than expected retail demand globally in large Ag equipment for the remainder of 2024. Factors supporting a downcycle bottoming in 2025 include future farm expectations remaining above their mid-2022 troughs and stabilized corn prices. Despite elevated inventories and potential downward pressure on sales, Deere remains confident in its ability to navigate the cycle.

Deere’s equipment sales are projected to fall by approximately 19% from the cycle-high in 2023 to the cycle-bottom in 2025, aligning with previous downcycles. The company’s share repurchase plan indicates potential for retiring around 8% of shares through YE26, supporting EPS by an average of 6%. Deere has a strong track record of cash allocation towards shareholders through dividends and buybacks, halving its share count since 2004.

The article concludes by discussing Deere’s valuation based on its 10-year average 2-year forward P/E multiple and estimates for 26E EPS, predicting a price target of $475/sh by YE24, implying a 27% upside. It is crucial for investors to be aware of the associated risks when considering stocks that do not trade on major exchanges.