Nothing Runs Like a Deere

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Deere (NYSE: DE) reported first quarter earnings on Feb. 13 and they widely beat analyst expectations. Earnings per share came in at $1.65, beating the estimates of $1.40 by 17.9%, and was a 26.9% increase year-over-year. Deere increased its outlook for 2013, although it was an increase that was lower-than-expected because of the drought and corn issues in the Midwest.

Company Overview

The world's largest agricultural and farming equipment maker also manufactures forestry, construction, commercial, and residential equipment. Deere is known for their tractors, harvesters, and riding lawn mowers, but they are more than just an equipment maker in the Midwest, they symbolize a way of life. Deere equipment helps these people make a living and the company does everything it can to help make it easier. Even their color is beloved and showed by people wearing the shirts, hats, and singing the John Deere Green song. This green is to strong equipment as Tiffany Blue is to fine jewelry. 

Record Setting Year

2012 was a record setting year for Deere. They set their all time highs for revenue and income, as well as showed positive growth in most every aspect of their business. Here are some of the highlights for the year:

  • Net income increased 9.5% to $3.065 billion
  • Earnings per share increased 15.1% to $7.63
  • Net sales and revenues increased 13% to $36.157 billion
  • Operating Profit increased 11.9% to $5.109 billion
  • Net sales of equipment operations increased 14%
  • Net sales in the North America increased 20%
  • Net sales outside of North America increased 5%

Market Outlook

There are several positives that will drive Deere higher this year. In their 2012 annual report, they stated the following outlook for 2013:

  • Equipment sales are projected to increase 10% in the first quarter
  • Equipment sales are expected to grow 5% for the fiscal year
  • Net income is expected to rise to around $3.2 billion
Corn production dropped 13% to a 6 year low in 2012 after one of the worst droughts the Midwest had ever seen. This caused a major spike in prices and will keep supplies tight in 2013. With this drop in supply, there will not be as high of a demand for Deere's products as they would like. If farmers are having trouble with their crops and harvesting, there is no way they will look to invest in new equipment. Keep an eye on corn as well as other crops, because they will have a direct effect on Deere's bottom line. 

Earnings and Projections

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Current Stock Snapshot

Before the market open on March 11, Deere is trading at $90.88. With trailing twelve month earnings of $7.99 per share, they are trading at a multiple of just 11.37. Over the last 5 years, their average price-to-earnings ratio has been 15.41, which would price this stock around $123. With earnings continuing to grow, this company could rise to $150 by 2015. 

Growth of the Dividend

Deere currently pays out a $1.84 annual dividend, representing a yield of about 2.10%. Most importantly, they have raised this dividend five times since 2010. This shows that management is dedicated to returning value to its shareholders. The dividend was already raised by 11% earlier this year, but I think another increase could occur in the fourth quarter due to the strong earnings growth that is expected.

Other Players in the Industry

CNH Global (NYSE: CNH) is a worldwide manufacturer of agricultural and construction equipment. They have seen a steady rise in earnings since 2010 and analysts expect a slow but continued growth through 2014. Annual earnings for 2012 were reported on Jan. 31, and they came in at $4.83, a 26.4% increase from 2011. However, earnings per share are only expected to rise 1% in 2013 and 5.1% in 2014. CNH Global is a great company, but it does not have the growth and strength of dividend that Deere has.

AGCO Corporation (NYSE: AGCO) manufactures equipment exclusively for the agricultural industry. They too have had a steady rise in earnings and reported full year 2012 earnings on Feb. 5. Their earnings came in at $5.25 per share, a 17.2% increase from 2011. AGCO, like CNH Global, sees slowed growth in 2013 and analysts expect an earnings increase of just 1.3%. They do pay a dividend of $0.40 annually, or 0.74%, but this is not nearly large enough to entice dividend investors. In a comparison, Deere takes the cake in this matchup. 

The Foolish Bottom Line

Deere is a great American company, founded over 175 years ago, with growth and a good yield. At current levels, the opportunity and potential is there. The market has hit all time highs for several days in a row, so I am personally waiting for a pullback to add a position in this company. Deere is the kind of company to buy and hold for 25 years. 

Joseph Solitro has no position in any stocks mentioned. 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!

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