Deere (NYSE:DE), an old-line industrial company making tractors and construction equipment, has become a darling of speculators.
Shares are up about 45% in 2021. They closed at $391.40 on May 10. That’s a market cap of over $122 billion, and a price to earnings ratio of 34.81. For a company that has been shrinking over the last three years, that’s high.
A year ago, when Deere stock was at $137, it would have been a good income name. If you bought it then, it still is, a 2.6% yield. If you’re buying now, however, your dividends are just .9%.
That means that if you’re buying Deere stock today it’s for capital gains. Are they likely?
The Bull Case
Technology is transforming Deere, as it is every industrial company.
For instance, Deere is now using Intel (NASDAQ:INTC) artificial intelligence to find and correct problems in welding. The pilot project began last year, at one of 36 plants, but it’s getting a lot of publicity in the industry press.
Deere is also rolling out some technology to its customers, called Precision Construction. The idea is to use sensors to measure the weight of payloads, the grades of driveways, and the condition of equipment. The network doing this is even branded to Deere as JDLink.
The technology initiatives have analysts excited. Deere stock is now in Cathie Woods’ Ark Space & Innovation ETF (NYSEARCA:ARKX). One analyst celebrated with a graphic showing a Deere tractor as a rocket. Notably Virgin Galactic (NASDAQ:SPCE), which actually produces space vehicles, is no longer in ARKX.
The Bear Case
The argument is that Deere’s use of technology could let it follow Wright’s Law, a framework created in the 1930s to forecast cost declines based on increasing production and cumulative improvements.
The problem is that Deere, founded in 1837, won’t be bringing all those cost declines to the bottom line. What it’s doing can make some farm equipment autonomous, it can cut manufacturing and maintenance costs. But none of this is happening in a vacuum. Competitors can match Deere’s innovations.
Another bullish argument involves the transition from gas-powered to electric-powered vehicles. Industrial companies like Deere are behind the curve on this, but they are proceeding. Electric engines are cheaper than gas engines, and more reliable, with fewer moving parts.
But are Deere’s competitors, which include Chinese, Japanese and European concerns, not going to follow Deere along this path? The idea that Deere stock could ever perform like Tesla once a “tipping point” is reached sounds farfetched.
Then there’s the fact that, as equipment is computerized, it becomes vulnerable to hacking. Bad actors half a world away could destroy job sites and undermine agricultural production. Deere is addressing the risks, but the risks are real.
DE Stock: The Bottom Line
Analysts at Tipranks recommend Deere highly, with 10 of 13 having it on their buy lists. But their one-year price target is below where Deere is currently trading.
JPMorgan (NYSE:JPM) analyst Ann Duignan has even put the sell light on, believing farming demand won’t increase this year. Morningstar has also become bearish, with a price target of $170, half the current price.
There are reasons to be bullish about Deere in the long-term, but I think the current optimism is overdone. I suspect the next few quarters will be disappointing, sending speculators scurrying.
Look at Deere again once all this irrational exuberance has abated.
At the time of publication, Dana Blankenhorn directly owned shares in INTC.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.