The farming industry is experiencing a downturn, leading to a downgrade in Deere stock. Evercore ISI analyst David Raso recently downgraded Deere shares from Buy to Hold, with a revised price target of $424, down from $456.
As a result, Deere stock has fallen 2.8% during midday trading, currently priced at $399.21. In comparison, the S&P 500 and Dow Jones Industrial Average have experienced declines of 0.7% and 0.8%, respectively. Year to date, Deere stock has decreased by about 7%, and it is currently around 10% lower than its 52-week closing high of nearly $450 per share.
Investors now face a decision – whether to buy now while the stock price is falling and its valuation appears more appealing, or wait for a potentially better entry point.
According to Raso's conversations with farming contacts, revenue risk is already evident. Farm income in the U.S. reached approximately $183 billion in 2022, representing a year-over-year increase of more than 30% compared to 2021. However, the Agriculture Department forecasts a decrease in farm income by approximately 23% in 2023, bringing it down to $141 billion.
Citi analyst Timothy Thein also highlighted a potentially modest decline in net farm income for 2024 in his Tuesday report.
This decrease in farm income directly impacts the sales of agricultural equipment, such as those produced by Deere. With farmers having less money to spend, demand for Deere's products is expected to decline.
This decline in farm income can be attributed to lower crop prices. For instance, corn prices have dropped by approximately 30% over the past year to $4.75 per bushel. Similarly, soybean prices have decreased by about 10% year over year, settling at around $13 per bushel.
Declining Commodity Prices Impact Wall Street Sentiment
The decline in commodity prices has begun to have an effect on the sentiment of Wall Street. Previously, approximately 70% of analysts covering Deere stock rated the shares as a Buy, with an average price target of around $480 per share. However, that ratio has now decreased to about 62%, with the average price target being around $450 per share. In comparison, the average Buy-rating ratio for stocks in the S&P 500 stands at approximately 55%.
Time to Reconsider Deere's Shares
Despite the growing pessimism on Wall Street, investors are faced with a decision - is now a good time to reinvest in Deere's shares?
Currently, Deere stock is trading at approximately 12.5 times the estimated earnings projected by analysts over the next 12 months. This valuation is below its average multiple of about 16 earnings over the past few years. However, it's important to note that Deere is a cyclical stock that is heavily influenced by commodity prices. For instance, it traded at 22 times earnings in 2020 and 2021 when farm income was increasing but dropped to as low as 11 times earnings in early 2023.
A Historical Perspective on Valuation
The current multiple for Deere is close to its lowest point. In late 2018, the stock traded around $135 per share and had a similar valuation. Back then, it proved to be a good time to buy; however, it is worth noting that Deere's subsequent rise coincided with a significant increase in corn prices - from below $4 a bushel to more than $8 a bushel. It's essential to understand that history does not guarantee a repeat of these circumstances.
Commodity Prices and Deere Stock
It can be challenging to disentangle the impact of commodity prices on Deere stock. Nevertheless, investors should consider keeping it on their list of potential investment ideas. Ultimately, crop price forecasts will inevitably change, just like the weather.
In the future, as commodity prices rise, Deere stock may regain the confidence of Wall Street analysts.