Is Deere a Good Stock to Buy?
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In the long term, agriculture is seen as a candidate for a global growth industry. A swelling world population will require more food; a richer population will demand more meat in its diet, resulting in even more food consumption in order to feed the necessary animals. One company plugged in to this trend is Deere & Company (NYSE: DE).
The fourth quarter of Deere’s fiscal year ended in October 2012. Revenue was up 13% from the previous fiscal year, when in turn it had been 23% higher than in the fiscal year ending in October 2010. Margins have fallen but have been kept under control, which has resulted in significant increases in earnings over this period; for example, net income was up 9% in the last fiscal year from a year earlier. In addition, Deere has been reducing its share count with the result being an increase in EPS from $6.63 for the fiscal year ending in late 2011 to $7.63 in its most recent year. Results for the fourth quarter of the company’s fiscal year showed smaller gains in revenue and earnings, however, meaning that growth could be slowing.
We’ve mentioned that trailing earnings, as of Deere & Company’s most recent report, are $7.63; that corresponds with a P/E multiple of 12. Even if growth is at a low level, then, the stock might still be considered undervalued due to its cheap pricing. Analyst estimates are for $8.36 per share in earnings this year; that assumes a 10% EPS growth rate, and with likely aid coming through buyback we think that may be high but certainly not unreasonable. That would imply a current-year P/E of 11, and over the long term we think that Deere should be able to at least keep its business steady.
Warren Buffett liked Deere & Company during the third quarter of 2012, with Berkshire Hathaway initiating a position of almost 4 million shares in the company (see Buffett's stock picks). Partner Fund Management, which is managed by Christopher Medlock James, also reported a new position in Deere (check out more stocks Partner was buying). Billionaire Steve Cohen’s SAC Capital Advisors increased its own stake in Deere by 11% and closed September with a little over 670,000 shares in its portfolio (find Cohen's favorite stocks).
We can compare Deere to other farm or construction machinery companies including CNH Global NV (NYSE: CNH), Caterpillar (NYSE: CAT), Kubota (NYSE: KUB), and Joy Global (NYSE: JOY). CNH and Joy both trade at 9 times forward earnings estimates, making them actually a bit cheaper than Deere on that basis. We’d note that these two stocks each have a beta greater than 2, indicating that they are more exposed to the broader market (Deere’s is a somewhat lower 1.4) and therefore more vulnerable to bearish macro news. While CNH’s recent growth rates have been modest, and we’d struggle to recommend it over Deere, Joy Global reported revenue and earnings growth of about 20% in its most recent quarter compared to the same period in the previous fiscal year. As a result it may be worth considering in addition to Deere.
Kubota has also been reporting high growth rates--in the third quarter of 2012, net income was up 40% from its levels in Q3 2011-- so even though the stock is the priciest of this peer group at 17 times trailing earnings it might be worth looking into as well. Caterpillar is down 13% in the last year, and last quarter was actually a poor one with sales and net income down substantially. With a trailing P/E of 11, only slightly below Deere’s, we don’t think that Caterpillar is quite as attractive but is cheap enough in absolute terms if an investor would prefer a stronger brand name or is interested in buying multiple machinery stocks.
Deere seems like an interesting value play to us; even if earnings growth rates are going to be lower now than in the recent past, the stock is cheap and buybacks can be used to help with EPS growth. The company’s peers also generally look like good prospects, with low multiples in some cases and strong recent performance in others.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!