Deere and Company (DE) had a roller coaster year. It opened the year just under $78/share, skyrocketed to a 52-week high of $89.70 before falling to a 52-week low of $69.51, and looks to be closing the year near the $84/share level. That is a 29% variance through the year. The farming equipment giant has enjoyed high demand with continually growing crop prices. Is this the time to look elsewhere for future gains?
Deere has enjoyed about a 10% price appreciation on the year thus far, which is actually below the S&P 500 benchmark return. DE outperformed industrial machining giant and rival CAT this year. The story for DE is very different looking forward though. Deere has enjoyed rising crop prices for years, and with DE tools have increased efficiency on farms exponentially over the past decades. The one thing that DE can't control is the weather.
In 2012, the Midwest suffered through horrible record setting droughts. While farmers have enjoyed the profit margins provided by increased efficiency and rising demand for product, those farmers were unable to produce crops at the same rate as years past. Combine the droughts with above average temperatures in the Midwest and crops were literally burning up in farm fields. Because of this, farmers won't have the profit margins they are accustomed to. Without those profit margins, farmers won't be able to replace old equipment in 2013, or upgrade to more efficient equipment. DE will need to branch out in 2013 if the industrial giant hopes to continue to enjoy the 12.9% revenue growth it enjoyed this past year.
Deere's core business is in the United States and Canada, and has actually seen its international sales (in relation to domestic sales) decrease. To fight to stay more diversified, and to avoid localized adverse weather conditions that effect sales, DE has branched out into the construction equipment sector more heavily. That puts DE square against companies like CAT, CMI, and many other giants. This move could prove to be a true test of DE's ability to convert customers to view Deere as a machining giant, not just a farming giant. With a highly competitive market, DE could be entering into a "race to the bottom" pricing competition. That certainly isn't a way to promote growth for a company desperate to find it.
Currently, Deere fundamentals and technicals aren't that strong either. DE is seeing hard resistance at the $86.85 price level, and has support at the $77 level. Considering current pricing, the downside shows more risk than the upside allows. DE has a P/E of 11.11, a PEG of 1.03, a P/S of .91, and a Forward P/E ratio of 9.54. Compare those to competitor Caterpillar (P/E of 8.99, .68 PEG, P/S .85, and a Forward P/E of 10.09). Comparing the two shows that Caterpillar has a stronger fundamental position currently than DE.
The industrial space had a very mixed year. In 2013, however, the industrial space could see phenomenal growth as countries around the world do everything possible to get populations back to work. DE enjoyed some success in 2012, but the technicals and fundamentals just don't add up for a market perform type of year in 2013. There are simply too many headwinds for the giant to fight through. I would look towards rivals CAT and CMI for market outperform possibilities.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.