Earnings

Comparing Terex Corporation (TEX) and Deere & Company (DE)

Terex Corporation (NYSE:TEX) shares are up more than 45.89% this year and recently decreased -1.70% or -$0.78 to settle at $45.22. Deere & Company (NYSE:DE), on the other hand, is up 46.22% year to date as of 12/05/2017. It currently trades at $150.09 and has returned 0.86% during the past week.

Terex Corporation (NYSE:TEX) and Deere & Company (NYSE:DE) are the two most active stocks in the Farm & Construction Machinery industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect TEX to grow earnings at a 48.68% annual rate over the next 5 years. Comparatively, DE is expected to grow at a 19.79% annual rate. All else equal, TEX’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. EBITDA margin of 18.98% for Deere & Company (DE).

Cash Flow 




If there’s one thing investors care more about than earnings, it’s cash flow. TEX’s free cash flow (“FCF”) per share for the trailing twelve months was +0.96. Comparatively, DE’s free cash flow per share was +1.40. On a percent-of-sales basis, TEX’s free cash flow was 1.82% while DE converted 1.51% of its revenues into cash flow. This means that, for a given level of sales, TEX is able to generate more free cash flow for investors.

Liquidity and Financial Risk

TEX’s debt-to-equity ratio is 0.71 versus a D/E of 4.37 for DE. DE is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

TEX trades at a forward P/E of 20.87, a P/B of 2.93, and a P/S of 0.90, compared to a forward P/E of 15.75, a P/B of 5.64, and a P/S of 1.84 for DE. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. TEX is currently priced at a -1.44% to its one-year price target of 45.88. Comparatively, DE is -3.04% relative to its price target of 154.80. This suggests that DE is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for TEX and 2.30 for DE, which implies that analysts are more bullish on the outlook for TEX.

Risk and Volatility

Beta is a metric that investors frequently use to analyze a stock’s systematic risk. A beta above 1 implies above average market volatility. Conversely, a stock with a beta below 1 is seen as less risky than the overall market. TEX has a beta of 1.90 and DE’s beta is 0.77. DE’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. TEX has a short ratio of 6.54 compared to a short interest of 4.93 for DE. This implies that the market is currently less bearish on the outlook for DE.

Summary

Deere & Company (NYSE:DE) beats Terex Corporation (NYSE:TEX) on a total of 8 of the 14 factors compared between the two stocks. DE is growing fastly, generates a higher return on investment and has higher cash flow per share. DE is more undervalued relative to its price target. Finally, DE has better sentiment signals based on short interest.

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