Deere’s forward PE multiple
In the previous part of this series, we looked at Deere’s (DE) stock performance in 2018 so far. In this part, we’ll compare Deere’s valuation with one of its peers.
As of September 24, Deere’s one year forward PE multiple was 13.3x. Caterpillar (CAT) had a PE multiple of 12.3x. A forward PE valuation considers future earnings. Investors can use forward PE multiples to compare two or more companies operating in the same industry to see which ones are overvalued and which ones are undervalued.
Is Deere overvalued?
Deere reported strong fiscal Q3 2018 earnings and reported adjusted EPS of $2.59, an increase of 31.5% over the previous year. As mentioned above, Deere is trading at one year forward multiple PE of 13.3x. Analysts have projected that Deere’s adjusted earnings per share for the next four quarters would be around $11.14, an increase of ~29.50% over the previous year. The projected growth is expected to be driven by the continued contribution from the acquired Wirtgen group. DE has also acquired PLA, a sprayer and planter manufacturer. Further, DE has entered a strategic agreement with Wacker Neuson to supply compact excavators. Deere is also looking to increase the product prices to overcome the increase of raw materials and freight costs.
On the other hand, analysts have projected CAT’s adjusted EPS for the next four quarters to be at $12.08, which implies an increase of 22% over the previous year. With DE’s projected earnings per share growth higher than CAT’s projected earnings growth, DE is trading at a premium to its peer CAT.
Investors looking to invest indirectly in Deere can invest in the Industrial Select Sector SPDR Fund (XLI), which invests 2.0% of its portfolio in DE. The fund also provides exposure to 3M (MMM) and Honeywell (HON) with weights of 5.2% and 5.1%, respectively, as of September 24, 2018.