Is Deere a Good Stock to Buy?
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The second quarter of Deere's (NYSE: DE) fiscal year ended in April, with the company experiencing a 9% increase in revenue versus a year earlier but only a 3% rise in earnings as net margins declined. During the quarter (and during fiscal Q1 as well), growth was driven by the agriculture and turf business, where a double-digit percentage increase in sales offset declines in the much smaller construction and forestry segment.
Deere has been buying back shares, and so, earnings per share did increase at a somewhat faster rate. The good Q2 numbers built on the good performance during the first quarter of the fiscal year, to the point that the six month period as a whole saw 13% EPS growth from levels a year ago. There has been a large buildup in receivables and inventory, with cash flow from operations being negative as a result, but that appears to be seasonal in nature.
A closer look at Deere
At its current market capitalization of $32 billion, Deere trades at 10 times trailing earnings -- fairly cheap considering the recent financial performance. Some analysts believe that agriculture is poised to be a growth industry as the world population grows and as the richer population in developing countries consumes more meat (which is more agriculturally intensive to produce), which could help Deere as well as its peers. Consensus forecasts are for moderate earnings growth going forward, as shown by a forward P/E of 9 and a five-year PEG ratio of about 1.
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Comparison to peers
Other agricultural equipment companies include AGCO (NYSE: AGCO) and Lindsay (NYSE: LNN). Similar to Deere, AGCO has been experiencing higher revenue but is not quite as good in terms of net income (in fact, earnings fell slightly in its most recent quarter compared to the same period in the previous year). The company is valued at 10 times its trailing earnings, in line with Deere. Lindsay features a premium to these companies, with trailing and forward P/Es in the teens, though recent reports have shown impressive improvements on both top and bottom lines. Still, a number of market players are bearish as shown by the fact that 22% of the float is held short.
We can also compare Deere to Caterpillar (NYSE: CAT) and CNH Global (NYSE: CNH). Caterpillar seems to be suffering from reduced demand for construction and mining equipment, with double-digit percentage declines in both revenue and net income last quarter compared to the first quarter of 2012. The stock is down 2% in the last year against a rising market as a result, which has brought the stock’s dividend yield close to 3% at current dividend levels and its trailing P/E to 11 -- a small premium over Deere. Still, we think that we’d avoid it at least for now.
In quantitative terms, CNH looks quite cheap, with trailing and forward earnings multiples of 8 and with a five-year PEG ratio of 0.70. The company has been seeing slight revenue growth, and somewhat wider margins, though we would warn investors that, statistically, CNH is highly correlated with market indices as the stock’s beta is 2.7.
We’d be interested in looking into Lindsay and trying to understand what the bear case for the stock is, though compared to AGCO, we think that we would prefer Deere on the basis of better recent results and a somewhat better brand name. We also would call CNH at least a prospective value stock, and if its business continues to hold up, it would be worth considering at these prices.
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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 owns shares of Lindsay. 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!