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Deere's Earnings Might Experience Another Dark Quarter in 3Q16

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Part 8
Deere's Earnings Might Experience Another Dark Quarter in 3Q16 PART 8 OF 8

Why Did Wall Street Turn Frosty on Deere in 2016?

Deere’s YTD stock returns

Deere & Company’s (DE) YTD (year-to-date) returns were worse than the S&P 500 Index as of August 11. Deere is the world’s largest agriculture (MOO) equipment manufacturer. It has grown by a paltry 2.5% YTD until August 11. Investors invested in the broader market would have earned 8.6% from the S&P 500 Index during the same period. Among its peers, AGCO (AGCO) shares have gained 6.7% YTD until August 11. The company recouped its losses from the impact of its 2Q16 earnings on August 4. It rose 3.3% on August 5.

CNH Industrial (CNHI) has the second-largest market share in tractor (DBA) sales in North America. It’s by far the leader of the pack. CNH shares have risen 12.4% YTD—comfortably beating the S&P 500’s returns in the same period.

Why Did Wall Street Turn Frosty on Deere in 2016?

Why Did Wall Street Turn Frosty on Deere in 2016?

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Pricing multiples

As of August 11, 2016, AGCO was trading at a trailing PE (price-to-earnings) multiple of 17.9x—near its five-year high of 18.8x. In comparison, Deere is trading at a trailing PE multiple of 15.2x—significantly lower than its high of 17x on June 6, 2016. CNH Industrial is trading at a trailing PE multiple of 19.7x—lower than its five-year high multiple of 26.6x on October 9, 2015. It’s interesting to note that Deere & Company’s operating margin in the last five years has been between 12% and 17%. AGCO’s operating margins have been 4.8%–8.3%. CNH Industrial’s operating margins in the last five years have been 8.9%–9.6%. In 2016, CNH Industrial and Deere’s operating margins are expected to be 5.7%. AGCO’s operating margins are forecast at 4%. Therefore, it seems that markets have punished Deere and CNH Industrials for not being able to maintain operating characteristics. They rewarded AGCO for doing the opposite.

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