Deere has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 10.9% to $423.23 per share while the index has gained 6.1%.
Is now the time to buy Deere, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.We're cautious about Deere. Here are three reasons why we avoid DE and a stock we'd rather own.
Why Is Deere Not Exciting?
Revolutionizing agriculture with the first self-polishing cast-steel plow in the 1800s, Deere (NYSE:DE) manufactures and distributes advanced agricultural, construction, forestry, and turf care equipment.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Deere’s 4.9% annualized revenue growth over the last five years was tepid. This was below our standard for the industrials sector. 
2. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Deere’s $65.19 billion of debt exceeds the $8.48 billion of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $11.16 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.
3. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Deere’s revenue to drop by 16.4%, a decrease from its 2.6% annualized declines for the past two years. This projection is underwhelming and suggests its products and services will see some demand headwinds.
Final Judgment
Deere isn’t a terrible business, but it doesn’t pass our bar. That said, the stock currently trades at 20.1× forward price-to-earnings (or $423.23 per share). This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there. We’d recommend looking at Google, whose cloud computing and YouTube divisions are firing on all cylinders.
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