After going anywhere for more than three years, the shares of Deere(NYSE: DE) finally burst to a new all-time high on Nov. 25 after the company reported its fourth-quarter earnings and 2024 results (for periods ended Oct. 27). But Deere’s earnings fell by more than 30 percent in fiscal 2024, and management is planning even lower earnings in fiscal 2025.
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Here’s why Deere stock is rising while its earnings are falling, and why it remains the best dividend stock to buy right now.
Image source: Getty Images.
Understanding the value of expectations is an important skill to be a great investor. A great example would be Nvidiawhich on November 20 reported disappointing third-quarter results and raised its outlook for the year. Despite that, the stock price has fallen since then because investors’ expectations for the GPU powerhouse were already high.
By comparison, expectations for Deere have been subdued for some time. The agriculture, forestry, and construction equipment giant entered the cycle early in late 2020 as prices for commodities such as corn, soybeans and wheat rose, and spending among Deere customers followed suit. Deere’s earnings rose sharply in revenue in 2021 and in revenue in 2022 before reaching an all-time high in revenue in 2023. But because Deere’s stock price soared in 2021, the stock failed to advance despite the company’s higher earnings.
DE data and YCharts.
In other words, Wall Street expected Deere to deliver unprecedented growth in earnings, which it did. But after spending so much money drawn from the following years, the decline was natural.
When Deere reported its 2023 financial results in Nov. 22, 2023, forecast revenue of $7.75 billion to $8.25 billion in 2024 revenue. For the full year, it undercut this estimate, and ended up reporting $7.1 billion in revenue. In its Q4 financial statement on Nov. 21, Deere said it expects 2025 net income of $5 billion to $5.5 billion, which would represent a 26% decrease in the medium term from fiscal 2024 and a 48% decrease from fiscal 2023.
However, the estimated range is still above what Deere was doing before the pandemic. And at its current market cap of $126.5 billion, $5.25 billion in revenue would result in a price-to-earnings ratio of 24. That’s fair value for an industry-leading company that expects a second straight year of low earnings. .
All that said, Deere stock may be showing signs that the outlook may be even worse than the company presented. Management also provided some encouraging commentary on the earnings call.
During the question-and-answer portion of Deere’s Q4 earnings call, several analysts asked questions that weighed in on Deere’s estimates, particularly on the quarter-to-quarter breakdown.
Due to lower earnings in the second half of fiscal 2024 compared to the first half, Deere’s results look better as it progresses into the coming year. In fact, it could see a small growth in the second half.
Deere was also asked about how the new administration in Washington would affect its business. Chief Executive Officer John May noted that more than 75 percent of all products sold by Deere in the US are assembled in the US – leaving the company in a good position if tariffs increase the cost of imported heavy machinery and equipment.
In short, Deere expects that its results will be slightly changed as it leads to the second quarter of the financial year, which could point to a return to financial growth in 2026. If that happens, Deere stock may start to look cheap.
Deere has an excellent record of reinvesting in its business, pouring money into new technology, raising its dividend, and aggressively buying back stock. Because the stock price had been stagnant for a long time, it makes sense to gather hope that the company’s financial decline could end this fiscal year.
However, there is a lot of uncertainty given the pressure on demand in three of Deere’s business segments – manufacturing and precision farming, small farming and turf, construction and forestry. Although Deere does most of its manufacturing in the US, it has a large international business that could come under pressure if other countries retaliate with US tariffs and trade barriers on US-made products.
For these reasons, investors should approach Deere with a long-term mindset and avoid getting too caught up in the forecast period. Deere’s dividend at the current share price may only be 1.5%, but its capital return plan also includes strong buybacks. Part of the reason Deere remains a great value today is that it has reduced its dividend yield by more than 20% over the past decade, allowing its earnings per share to grow faster than its earnings.
Investors can find high-yielding names in the industry sector, but few companies match the industry leadership and innovative culture of Deere. This stock looks like a great buy for investors who want to add a growth-oriented company that can withstand the inevitable market cyclicality.
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Daniel Foelber does not have a seat in any of the listed stocks. The Motley Fool has positions in and recommends Deere & Company and Nvidia. The Motley Fool has a disclosure policy.
This Nonstop Dividend Stock Is Up 21% in Three Months. Here’s Why It’s Still a Good Buy in December. first published by The Motley Fool
