Deere & Company stock faces valuation test after mixed quarter

Deere & Company stock is facing a higher valuation bar after a mixed operating picture. In an analysis published by Seeking Alpha on Tuesday, November 10, analyst Daniel Jones reaffirmed a Hold view and argued that the shares have become expensive relative to the company's near-term earnings profile.

The analysis said revenue in Deere's latest reported quarter rose to 12.61 billion US dollars from 12.02 billion US dollars a year earlier. Net income increased to 1.38 billion US dollars from 1.29 billion US dollars. The improvement was less consistent below the profit line: operating cash flow fell to 2.21 billion US dollars from 2.90 billion US dollars, while EBITDA declined to 2.29 billion US dollars from 2.38 billion US dollars. Excluding working-capital changes, operating cash flow increased from 1.91 billion US dollars to 2.21 billion US dollars.

Segment performance remains uneven

Construction and Forestry provided the strongest contribution in the analysis. Revenue rose to 3.68 billion US dollars from 3.11 billion US dollars, while segment profit increased to 436 million US dollars from 237 million US dollars. Higher shipment volumes in the United States and higher realized prices supported the advance. Management also expects United States and Canadian earthmoving equipment sales to increase by 5% to 10% this year, according to the analysis.

Small Agriculture and Turf also expanded. Revenue reached 3.45 billion US dollars, compared with 3.08 billion US dollars a year earlier, and segment profit rose to 622 million US dollars from 485 million US dollars. The analysis attributed the gains to higher shipments in the United States, Europe and India, higher prices and resilient demand from dairy and livestock customers. Mowing markets also showed signs of normalization.

Production and Precision Agriculture remained the main weak spot. Revenue declined to 4.11 billion US dollars from 4.38 billion US dollars as shipment volumes fell in Brazil and Europe. Segment profit dropped to 527 million US dollars from 580 million US dollars, with higher material costs and an unfavorable sales mix adding pressure.

Guidance keeps valuation in focus

Management expects fiscal-year net income of 4.75 billion to 5 billion US dollars, below the 5.03 billion US dollars reported for the previous year. The analysis also points to adjusted operating cash flow of 7.31 billion US dollars and EBITDA of 11.55 billion US dollars for the full year, both lower than the prior period.

That combination leaves investors balancing improving revenue against a less supportive profit and cash-flow outlook. Jones said Deere trades at a premium to comparable companies across several valuation measures and could face a downgrade if the stock rises further. The assessment makes the next earnings update important: Deere must show that stronger businesses can offset weakness in its core precision-agriculture operations.

Deere & Company stock traded at 615.80 euros on Lang & Schwarz at 14:00 CET on Wednesday, November 11.

Broader conditions for US equities remain relevant for industrial shares; see the current S&P 500 market environment.

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