John Deere is in the headlines because it has announced plans to eliminate about 600 jobs from three factories in the US.[1]
This news attracted our attention, because we have seen selling over the past couple of years, including people using our Stock Diversification Trust to take large gains without incurring capital gains taxes.
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Those sales look pretty good today, as the stock now trades at about $360 a share, which is down almost 20% from its 52 week high of close to $450.
The market cap of Deere is about $100 billion.
As the chart shows, Deere had an enormous run-up mostly in 2020 and 2021, and has traded within a fairly wide range since then.
The announcement by Deere of impending layoffs could mean that management fears that the future will not be as bright as the past. CNN reports that the company said, “These changes are being made due to reduced demand for the products produced at these facilities.”
According to the report, company executives expect 2024 revenue to decline by about 30% compared to 2023. The stock is down about 20%.
Valuation
The stock of John Deere is relatively cheap when evaluated by the price/earnings ratio, which is about 10.5. Here is a graph of the history of the p/e ratio for Deere:
However, the concern is that these are trailing earnings. And if Deere revenues are down now, profits are likely to fall in the future.
Some see the stock as a levered play on the agriculture sector, which is Deere’s market. The USDA projects that farm income will fall by 31% in 2024.[2]
The market cap of Deere is about $100 billion now, and if 2024 earnings are the projected $7 billion, that implies a current year p/e (also called a forward p/e) of about 14.25. That’s still cheaper than the S&P 500’s p/e.
But, the risk seems to be a cyclical risk that Deere’s revenues can head down. Historically, revenues are still nearer peak levels than cycle lows. Here’s a chart of Deere earnings per share for the past 15 years:
If Deere earnings return to pre-pandemic levels, or even trend, there’s plenty of room on the downside.
Risk
John Deere stock seems fairly priced, or even cheap, based on current year expected earnings. But based on historical cyclical patterns, and relative weakness in the agriculture sector, and considering that companies don’t typically fire experienced skilled workers for short term issues, there could be significant downside risk to Deere that is not currently in the stock price.
Reduce or Eliminate the Tax on Sale
For holders of large positions of Deere, especially those who have large gains, the simplest risk management may be to sell the stock.
The biggest reason many such holders don’t want to sell is capital gains tax.
To avoid capital gains tax, a seller can use a Stock Diversification Trust, as some of our clients have done recently.
A Stock Diversification Trust allows a stockholder to avoid tax on the sale, eliminate the risk of holding a big chunk of stock, and still be able to benefit from the entire pre-tax value of the stock.
To learn more, advisors can request a case study, or arrange a call with one of our analysts. Schedule a call with Katherine Silk, or Connor Barth, or email them at [email protected], or [email protected]. Or call 703 437 9720. We look forward to hearing from you!
[1] https://www.cnn.com/2024/07/07/business/john-deere-mass-layoffs-2024/index.html
[2] https://www.ers.usda.gov/media/jmgphww0/transcript_farm-income-webinar_february-2024.pdf
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