Since June 2020, the S&P 500 has delivered a total return of 97.7%. But one standout stock has more than doubled the market - over the past five years, Deere has surged 236% to $520.65 per share. Its momentum hasn’t stopped as it’s also gained 18.5% in the last six months thanks to its solid quarterly results, beating the S&P by 19%.
Is there a buying opportunity in Deere, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Deere Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Deere. Here are three reasons why you should be careful with DE and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Deere grew its sales at a sluggish 3.2% compounded annual growth rate. This fell short of our benchmark for the industrials sector. 
2. EPS Took a Dip Over the Last Two Years
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
Sadly for Deere, its EPS declined by more than its revenue over the last two years, dropping 17.8%. This tells us the company struggled to adjust to shrinking demand.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Deere’s $66.32 billion of debt exceeds the $9.26 billion of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $9.03 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Deere could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Deere can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Deere, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at 26.6× forward P/E (or $520.65 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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