DE is generally considered a cyclical stock and it is often likened to CAT, which is why it trades at a relatively low P/E ratio. However, only about 15% of DE’s sales come from the construction business; the other 85% is related to agriculture, which is considerably less cyclical than construction.
It’s true that growers can put off the purchases of big-ticket ag machines during a soft economy, but they can’t put it off for long. Given the beating that tractors and combines take at modern industrial farms, these machines are generally replaced within five years. And people have to eat whether the economy is strong or not.
Bottom line: I think DE deserves a P/E ratio of at least 15.
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