After going practically nowhere for more than three years, shares of Deere (DE -0.87%) finally blasted to a new all-time high on Nov. 25 after the company reported its fiscal fourth-quarter and 2024 results (for the periods ended Oct. 27). But Deere's net income fell by more than 30% in fiscal 2024, and management is projecting even lower earnings in fiscal 2025.
Here's why Deere stock is going up while its earnings are going down, and why it remains an excellent dividend stock to buy now.
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Expectations are everything
Understanding the importance of expectations is an essential skill for becoming a great investor. A prime example would be Nvidia, which on Nov. 20 reported blowout 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 had been even higher.
By comparison, expectations for Deere have been fairly tepid for a while. The agriculture, forestry, and construction equipment giant entered a cyclical uptrend starting in late 2020 as commodity prices for products such as corn, soybeans, and wheat soared, and capital spending among Deere's core customers followed. Deere's earnings catapulted higher in fiscal 2021 and fiscal 2022 before reaching an all-time high in fiscal 2023. But because Deere's stock price rose so much in 2021, the stock failed to sustain its rally even as the company's earnings headed higher.
In other words, Wall Street expected Deere to deliver unprecedented earnings growth, which it did. But after so much capital spending was pulled forward, a slowdown was natural.
When Deere reported its fiscal 2023 results on Nov. 22, 2023, it forecast net income of $7.75 billion to $8.25 billion in fiscal 2024. Throughout the year, it reduced that estimate, and it ended up with $7.1 billion in net income. In its fiscal Q4 report on Nov. 21, Deere said it expects fiscal 2025 net income of $5 billion to $5.5 billion, which would amount to a 26% decline at the midpoint from fiscal 2024 and a whopping 48% decline from fiscal 2023.
However, that forecast range is still substantially above what Deere was raking in before the pandemic. And at its current market cap of about $126.5 billion, $5.25 billion in net income would result in a price-to-earnings ratio of about 24. That's a fairly reasonable valuation for an industry-leading company that expects a second straight year of lower earnings.
All told, Deere stock may be rallying because expectations may have been even worse than the company delivered. Management also offered some encouraging commentary on the earnings call.
Turning the tide
During the question-and-answer portion of Deere's fiscal Q4 earnings call, several analysts asked questions that drilled into the specifics of Deere's projections, particularly on the quarter-by-quarter breakdown.
Because of weaker earnings in the second half of fiscal 2024 compared to the first half, Deere's comparable results will look better as it progresses through the coming year. In fact, it could even see slight growth in the second half.
Deere was also asked about how the new administration in Washington would impact its business. Chief Executive Officer John May noted that more than 75% of all products that Deere sells in the U.S. are assembled in the U.S. -- leaving the company well positioned if tariffs increase the cost of imported heavy machinery and earth-moving equipment.
In sum, Deere anticipates that its results will be little changed as it heads toward the second half of the fiscal year, which could point toward a return to growth in fiscal 2026. If that occurs, Deere stock could begin to look cheap.
Deere remains a quality long-term investment
Deere has an excellent track record of reinvesting in its business, pouring money into technological innovations in automation, raising its dividend, and aggressively buying back stock. Because the stock price had stagnated for so long, it made sense for it to rally on the prospect that the company's earnings downturn could end this fiscal year.
Still, there's a lot of uncertainty given the demand pressures across Deere's three business units -- production and precision agriculture, small agriculture and turf, and construction and forestry. Although Deere does a lot of manufacturing in the U.S., it has a substantial international business that could come under pressure if other countries retaliate against U.S. tariffs with trade barriers of their own on U.S.-made products.
For these reasons, investors should approach Deere with a long-term mindset and avoid getting too caught up in the timing of its forecasts. Deere's dividend at the current share price may yield just 1.5%, but its capital return program also includes robust buybacks. Part of the reason Deere remains a great value today is that it has reduced its share count by more than 20% during the past decade, allowing its earnings per share to grow at a faster rate than its net income.
Investors can find higher-yielding names in the industrial sector, but few companies sport the industry leadership and innovative culture of Deere. This stock is looking like a great buy for investors who want to add a growth-focused company that can endure the inevitable market cyclicality.
