Deere stock is at risk as corn, soybeans, and wheat prices sink

Deere (NYSE: DE) stock price has been in a strong bearish trend in the past few months as it continued to underperform other industrial companies like Caterpillar and General Electric Aviation. It slumped to a low of $345 on Monday, its lowest point since May 2023. It has dropped by over 22% from its highest point in 2023. 

Deere has solid fundamentals

John Deere is a big industrial giant that dominates the agricultural machinery industry. Its main products are tractors, combines, harvesters, and lawnmowers, among other products. Some of its top competitors are companies like Caterpillar, Hitachi, Komatsu, AGCO, and CNH Industrial.

Deere has been in a strong growth trajectory in the past few years as its revenue rose from over $31.2 billion in 2020 to over $55 billion in the last financial year and $58 billion in the training twelve months.

The company has also become highly profitable as its net income jumped from over $2.7 billion in 2020 to $10.1 billion in the last financial year. This is important since the company has been boosting its shareholder returns in the past few years.

A rising net profit only matters when it is accompanied by falling outstanding shares. Data shows that its total outstanding shares dropped from over 313 million in 2020 to 275 million today. As a result, its earnings per share (EPS) has risen from $2.1 in April 2020 to $8.56 in the last quarter. 

Deere’s performance has happened at a time when the manufacturing industry has gone through challenges. The biggest one was on supply chains when companies struggled to get raw materials, including semiconductors because of the pandemic. 

Corn, wheat, and soybeans have crashed

The Deere stock price has pulled back as concerns about the company’s growth remain. The most recent financial results showed that its net income came in at $2.37 billion in the first quarter, down from $2.86 billion in the same period last year. 

This performance happened as Deere’s worldwide sales dropped by 12% to $15.2 billion as the company faced significant challenges, including slow growth. For the first six months of its financial year, the company’s sales fell by 9%. 

This slowdown is mostly because of the soft agricultural prices in the past few months. Corn, a highly popular crop, has dropped by over 52% from its highest point in 2022 and was trading at its lowest point since October 2020. 

Similarly, soybeans has tumbled in the past six consecutive months and is trading at its lowest level since September 2020. It is down by over 44% from its 2021 highs. Wheat is also down by over 60%.

In most cases, farmers lower their production and input purchases when prices are not doing well.

As a result, analysts expect that this week’s Deere earnings will not be good either. The expectation is that its sales will move in at $10.93 billion, down from the $15 billion it made a year earlier. 

Indeed, most analysts have been lowering their earnings in the past few months, which explains why the stock has underperformed the market. 

In its most recent results, the company predicted that its agricultural and turf business would be down by between 10% and 20% in the current fiscal year. Its construction and forestry business is also expected to be down a bit.

Is Deere a good buy?

Deere and other large companies in the agricultural sector are not doing well. Fundamentally, I believe that these woes will continue in the coming months as the prices of key agricultural commodities remain significantly lower. 

However, on the positive side, Deere is a high quality company with a big market share in the agricultural industry. It has a 50% market share in some key segments in the United States.

Historically, Deere has been a cyclical company that does well when the agricultural sector is doing well and vice versa. This decline has left a company that seems quite undervalued since it is trading at a P/E ratio of 10.36, lower than the industry average of 22.

It is not always a good thing to buy undervalued companies. In the past, some of the best-performing investments are companies that are overvalued like Nvidia and Microsoft. Therefore, it will take time for the Deere stock to bounce back. 

Deere stock price analysis

The weekly chart shows that the DE stock price has been in a downtrend in the past few years. It dropped from a high of $436 in 2022 to the current $340. It recently dropped below the key support at $350, its lowest point in May 2023. 

The stock has also slumped by over 50-week moving average, meaning that bears are in control. It has also moved below the 23.6% retracement point. Therefore, the stock will likely continue falling as sellers target the key support at $300.