Analyzing Deere’s Valuation Compared to Caterpillar
Deere’s forward PE multiple
In the previous part, we discussed analysts’ recommendations for Deere (DE). In this part, we’ll analyze Deere’s valuation compared to its peer.
As of June 20, 2017, Deere’s one-year forward PE (price-to-earnings) multiple stood at 18.80x—compared to Caterpillar’s PE multiple at 23.10x.
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The forward PE multiple is a valuation method that takes a company’s future earnings into account. It tells how much an investor is paying for stock per dollar of expected earnings in the next 12 months. The forward PE ratio is a tool that investors can use to compare two or more companies that operate in the same industry to check whether the stock is overvalued or undervalued.
Is Deere undervalued?
Currently, Deere is trading at a discount compared to Caterpillar. Due to Deere’s improved earnings and higher earnings guidance, its fiscal 2017 earnings are estimated to be 25.4% higher than its fiscal 2016 earnings. With Deere acquiring the Wirtgen Group, analysts expect Deere’s fiscal 2018 earnings to be $6.47 per share—7.3% growth compared to its fiscal 2017 earnings. Caterpillar’s fiscal 2017 earnings are projected to grow 20.7% compared to fiscal 2016. Analysts expect its fiscal 2018 earnings to grow 27.1% compared to fiscal 2017.
Caterpillar’s fiscal 2017 earnings are projected to grow 20.7% compared to fiscal 2016. Analysts expect its fiscal 2018 earnings to grow 27.1% compared to fiscal 2017—slightly better than Deere’s earnings growth. As a result, Caterpillar is trading at a premium compared to Deere.
Investors can invest in Deere indirectly by investing in the Industrial Select Sector SPDR Fund ETF (XLI), which has invested 1.8% of its holdings in Deere. The fund’s top holdings include General Electric (GE) and 3M (MMM) with weights of 7.9% and 5.70%, respectively, as of June 20, 2017.