We believe that Deere stock (NYSE: DE), included in the S&P500, is a better pick than Coca-Cola stock (NYSE: KO), also in the S&P500, given its better prospects. Although these companies are from different sectors, we compare them because they have a similar operating income of around $10-11 billion within the broader S&P500 index. The decision to invest often comes down to finding the best stocks within the parameters of certain characteristics that suit an investment style. The size of profits can matter, as larger profits can imply greater market power. Since these stocks are from different sectors, comparing P/S against one another may not be helpful. We compare their current multiples with the historical ones in the sections below to better understand their valuations.
Looking at stock returns, Coca-Cola
KO
1. Deere’s Revenue Growth Is Better
- Deere’s revenue growth has been much better, with an 11.3% average annual growth rate in the last three years, compared to 5.6% for Coca-Cola.
- Deere is benefiting from higher demand for agriculture equipment, given the above-average age of farming equipment in the U.S.
- The agricultural equipment demand has also been buoyed by rising farm income and better price realization.
- For Coca-Cola, both at-home and away-from-home channels have grown, primarily driven by solid pricing trends.
- Even if we look at the last twelve-month period revenues, Deere has fared better with sales growth of 30.3% vs. 8.4% for Coca-Cola.
- Deere’s sales growth over the recent quarters is being driven by higher volume/mix and better price realization, a trend expected to continue in the near term.
- For Coca-Cola, North America and Latin America segments saw strong 19% y-o-y sales growth in 2022, led by both volume growth and better price realization.
- Looking forward, a challenging macroeconomic environment and a strengthening dollar is expected to weigh on the company’s volume growth rate in the near term. Still, better pricing should drive the overall top-line growth.
- Our Deere Revenue Comparison and Coca-Cola Revenue Comparison dashboards provide more insight into the companies’ sales.
- Looking forward, Deere’s revenue is expected to grow faster than Coca-Cola’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 11% for Deere, compared to a 2% CAGR for Coca-Cola, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies negatively impacted by Covid and those not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
2. Coca-Cola Is More Profitable
- Deere’s reported operating margin rose from 14.1% in 2019 to 19.4% in 2022 due to better pricing. In comparison, Coca-Cola’s margin slid from 29.9% to 28.8% over this period.
- Looking at the last twelve-month period, Coca-Cola’s operating margin of 28.0% fares better than 22.6% for Deere.
- Our Deere Operating Income Comparison and Coca-Cola Operating Income Comparison dashboards provide more details.
- Coca-Cola’s free cash flow margin of 24.3% is better than 10.6% for Deere.
- Looking at financial risk, Coca-Cola fares better with its 16% debt as a percentage of equity much lower than 49% for Deere, and its 13% cash as a percentage of assets higher than 6% for the latter, implying that Coca-Cola has a better debt position and more cash cushion.
3. The Net of It All
- We see that Deere has demonstrated better revenue growth. On the other hand, Coca-Cola is more profitable and has a better financial position, partly explaining the difference in P/S multiple for both stocks.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Deere is the better choice.
- Looking at valuation, Coca-Cola fares better when compared to the historical average. DE stock trades at 2.0x trailing revenues, compared to its last five-year average of 1.9x, while KO trades at 6.1x trailing revenues vs. the last five-year average of 6.8x.
- Our Deere Valuation Ratios Comparison and Coca-Cola Valuation Ratios Comparison have more details.
- However, Deere’s faster sales growth expected in the next three years gives it a slight edge over Coca-Cola.
- For perspective, even if we consider a P/S multiple of 1.8x, marginally lower than its historical average, Deere’s revenue of $81 billion in the next three years will result in a higher market capitalization of around $146 billion compared to the $120 billion currently, implying over 20% potential returns.
- In contrast, Coca-Cola’s revenue will likely be about $46 billion in the next three years, and assuming the P/S multiple of 6.2x, marginally higher than the historical average, the market capitalization will be around $283 billion, vs. $267 billion currently, implying roughly 6% gains.
- Overall, we believe investors willing to choose between these two stocks will likely be better off buying Deere for the next three years.
While DE stock may outperform KO stock in the next three years, it is helpful to see how Deere’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Donaldson vs. Deere.
Given the higher inflation and the Fed raising interest rates, among other factors, DE stock has seen a 5% fall this year. But can it drop more from here? See how low Deere stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.
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