Tracing its history back more than 185 years, Deere (DE -0.79%) is a farming equipment and machinery stalwart that's closely identified with the agricultural industry. It's not often that companies boast of such lengthy histories as that of Deere, suggesting that Deere is a business with staying power and a stock which may bolster portfolios.
But investors are hardly in agreement about the best approach to shares of Deere. While some expect an investment in Deere to bear fruit, others are more skeptical about its prospects. To help make better sense of the different perspectives, two fool.com contributors weigh in and take a closer at the different arguments.
Deere's incredible run is looking a little long in the tooth
Lee Samaha: Deere is a great company, and it has excellent long-term growth prospects coming from the productivity benefits created by its equipment and precision agriculture solutions. In addition, its construction & forestry segment has substantial exposure to infrastructure spending due to its extensive range of road construction machinery. The long-term future looks great, but the near-term situation is more concerning.
First, two analysts have downgraded the stock recently, with Evercore analyst David Raso concerned about weaker conditions in Europe and Brazil. Meanwhile, Canaccord analyst Bobby Burleson is worried about slowing agricultural equipment sales, causing rising dealer inventory levels – suggesting fewer orders from Deere.
In addition, the prices of key crops like corn, soybean, wheat, and cotton are down over the last year (wheat and corn are down more than 30% over the period). Lower crop income will pressure farmers' income and spending on Deere's equipment. Moreover, given the strong run in Deere's equipment sales over the last few years, it might be time for farmers to pause, notably as interest rates have risen, making it more expensive to buy or lease equipment.
Adding all these factors together suggests a challenging near-term outlook for Deere and means now might not be the best time to buy into the stock.
With shares on sale, now's a great time to harvest shares of Deere
Scott Levine: Undeniably, there are concerns with near-terms factors pressuring Deere, but the company's successful history, spanning almost two centuries, suggests that this isn't the company's first rodeo.
The connection between falling commodity prices and farmers' enthusiasm for purchasing new equipment is understandable. It's imperative to remember though that this is a cyclical phenomenon. Crop prices may tumble -- as they have in the past -- but they won't be down forever. Of course, Deere's success in the past doesn't ensure similar success in the future, but it's certainly worth noting how resilient the company has been over the past few decades despite some ups and downs.
Prospective investors want to feel confident that management is adept at turning investments into profits. In fact, the return on equity metric is one of Warren Buffett's favorite ways to gauge a company's proficiency.
DE Return on Equity (5y Mean) data by YCharts.
Looking at Deere's five-year average return on equity, investors can see that over the past 30 years, Deere has achieved overall improvements in its ability to churn profits out of shareholders' investments -- an encouraging sign that current challenges are temporary and won't likely impede the company from long-term success.
Currently, forward-looking investors have a great opportunity to reap the benefit of low market enthusiasm for Deere's stock. Shares are changing hands at 11.3 times trailing earnings, representing a discount to their five-year average P/E of 19.7.
Is Deere a smart choice to cultivate a winning portfolio?
While there are debates about whether Deere's stock is a glass that's half full or half empty at the moment, it's fair to say that there are valid arguments to be made by both camps. Nonetheless, those who are committed to holding Deere stock through the current volatility may be rewarded in time for their patience. Those with a shorter investing horizon, conversely, may find another industrials stock to be a more appealing choice right now.
