The stock of Deere (NYSE:DE, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $367.97 per share and the market cap of $115.3 billion, Deere stock is estimated to be significantly overvalued. GF Value for Deere is shown in the chart below.
Because Deere is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.3% over the past three years and is estimated to grow 3.81% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Deere has a cash-to-debt ratio of 0.17, which which ranks worse than 82% of the companies in the industry of Farm & Heavy Construction Machinery. The overall financial strength of Deere is 3 out of 10, which indicates that the financial strength of Deere is poor. This is the debt and cash of Deere over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Deere has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $36.7 billion and earnings of $10.94 a share. Its operating margin is 13.11%, which ranks better than 85% of the companies in the industry of Farm & Heavy Construction Machinery. Overall, the profitability of Deere is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Deere over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Deere's 3-year average revenue growth rate is in the middle range of the companies in the industry of Farm & Heavy Construction Machinery. Deere's 3-year average EBITDA growth rate is 10.9%, which ranks in the middle range of the companies in the industry of Farm & Heavy Construction Machinery.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Deere's ROIC is 5.90 while its WACC came in at 5.81. The historical ROIC vs WACC comparison of Deere is shown below:
Overall, The stock of Deere (NYSE:DE, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Farm & Heavy Construction Machinery. To learn more about Deere stock, you can check out its 30-year Financials here.
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