Deere & Company (NYSE:DE) is not a tech company. It’s not a growth company. It’s a tractor company. To an investor this means DE stock is a a cyclical company. Right now, the business cycle is with it. But that doesn’t mean you value it like it always will be.
Investors just learned this lesson the hard way. Deere stock rolled over after earning $1.78 billion, $5.68 per share, on revenue of $12 billion for the quarter ending in April. Sales were up 34% over a year earlier, and the number beat analyst estimates by 25%.
Since then, shares of Deere have sputtered, losing 2% while the S&P 500 index is up 2%. It traded below $325 a share on June 17 but went into the Fourth of July holiday at $352.50. That’s a market cap of $110 billion and a price-to-earnings ratio of 24.3.
DE Bulls Show ‘Nothing Runs Like a Deere’
Those who are bullish on DE stock, like CNBC analyst Jim Cramer, say it’s just at the start of a new growth cycle, one that has “more legs” than previous ones. Kinda reminds me of the equipment maker’s iconic “Nothing Runs Like a Deere” motto.
But that’s not what the stock’s chart says. Shares peaked at $394 soon after Deere raised its dividend, to 90 cents a share. This was on the back of steady hype by analysts. There are 13 out of 19 analysts who have the buy light out, with a price target that’s 20.5% higher than the July 2 close.
One Deere bull calls it the “Tesla (NASDAQ:TSLA) of farming.” The stock is 2.54% (13 of 47 stocks) of Cathie Woods’ ARK Autonomous Technology & Robotics ETF (BATS:ARKQ) as well as the ARK Space Exploration and Innovation ETF (BATS:ARKX) (1.53%, at 24 of 40) . This last led one wag to show a Deere tractor as a spaceship taking off, and Deere itself to tweet a picture of a tractor being captured by an alien spaceship.
Deere is serious about the tech story. It’s putting out Jahmy Hindman, who has been chief technology office for a year, to say tout that the equipment maker employs more software engineers than mechanical ones.
Bears Are Lurking
Deere isn’t the only company putting more chips into tractors. Its rivals are on top of the trend, too.
CNH Industrial (NYSE:CNHI), spun-out of Fiat in 2012 with brands including Case and New Holland, is buying Raven Industries (NASDAQ:RAVN). The idea of their tech is to treat each plant as a separate data point and customize its care.
AGCO (NYSE:AGCO), which owns Massey Ferguson, is pushing a German-made line called Fendt, which has been taking market share from Deere.
The entire tractor market was worth $60.3 billion in 2020 and is growing at 4.4% per year. China is the fastest-growing market, but that country is intent on domestic equipment. Within North America, Mexico is the fastest-growing market.
This means there’s a limited opportunity for the fancy tractors and combines Deere and its main rivals are pushing. Much of the industry’s growth remains with small farms just now becoming mechanized.
The Bottom Line
Reporters pounced on word that Bill Gates gave his wife Melinda $850 million in DE stock as part of their divorce settlement. The value of those shares has fallen 9% since the story came out.
None of this is to disparage Deere, its products, plans or short-term prospects. The farm equipment sector seems to be at the start of a growth cycle. But Deere won’t get all that growth and the market’s growth is not all at the leading edge.
To be sure, Deere is the General Motors (NYSE:GM) of tractors, not the Tesla. Not that there’s anything wrong with that. GM is up 50% in the first half of 2021. Just don’t bet on Deere going to the moon, either. See it for what it is.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.