Time To Buy The Farm?

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

On a beautiful day in September with the crisp coolness of October in the air I went to a local community fair. It’s like traveling back in time with the 4-H livestock exhibits, the touching floral arranging displays, and the gleaming jars of jams, jellies and pickles. The green and yellow John Deere logo is still omnipresent. Sure, there are web site competitions and digital photography displays now but the same spirit of small town and agricultural livelihood is there. There is the crowning of the Local King and Queen and tractor pulls and hayrides all down at the American Legion hall. But there is a shadow looming over the smiling faces and the future of American agriculture.

At the local high school agriculture courses were cut in 1989 and what was once all farmland has been bought up and subdivided over and over again. The Chipotle has moved in and the McDonald’s and all the other chains that have overtaken this small town. The remaining farms are all small long time family run operations. We’ve heard of the death of the family farm for years and to be sure farmland can be more valuable to builders as golf courses or residential communities. Fortunately or unfortunately land prices have provided an easy out for farmers who are struggling.

Just a few weeks ago I was talking to a man who runs a farm market with nice produce, clean and a little pricey, but I like to buy local when I can. Somehow he got started on what seemed to be a long standing grudge about farmers saying, “If the farmers can’t make money, it’s their own d*** fault.” He was speaking mainly about farm subsidies (over $15 billion a year at last count) but he had an especial antipathy to farmers that buy brand new farm equipment.

It looks like many farmers aren’t buying new if the Q2 earnings release from Titan Machinery (NASDAQ: TITN) is to be believed. The stock plunged over 20% on September 10 after missing estimates.  The company has had to lower prices on even their used farm equipment after the worst drought in generations pressured margins.

Maybe the miss was stock specific to Titan as Deere & Company (NYSE: DE) only fell .14% the same day. Deere is still off around 15% from its 52 week high of $89.70 and had once touched almost $100 in Spring 2011.  Over the long term Deere had performed well rising since 2009 when it was in the twenties.

John Deere is certainly an iconic name, founded in 1837 and operates in two segments: Agriculture and Turf management, Construction and Forestry. The company also provides financing for the equipment, both used and new. It’s possible Deere averted a sympathetic share drop because it does have those other supportive divisions of forestry, turf management and construction.

But why buy Deere at all? The P/E at 10.42 is not that much higher than the industry average of 9.95 and the 2.40% yield is attractive. Does that make up for a stock that is only up 4.24% while the S&P 500 is up 23.72% over 52 weeks? Additionally, Deere has debt, lots of it with 31.38 billion dollars to 4.12 billion in total cash.

There’s been little insider selling or buying. It seems like insiders are holding their breath, maybe waiting for the next earnings release in November.

I visited the local John Deere dealer and it was busy on a midday Monday, probably would have been busier at 7 a.m. It's a very companionable place with coffee and cake and a placid Lab retriever, the closest thing to an old time general store I've seen in years. There are signs touting the ATV and compact tractor sales. There are sales desks, financing desks but the busiest was the Parts counter at the back (where the coffee and cake are). I gleaned from this that maybe farmers are fixing up and making do rather than buying the high ticket tractors and so it would seem from Titan's numbers.

Deere's larger competitor, Caterpillar (NYSE: CAT), was up on the same day. It also has a 2.40% yield and the P/E is smaller at 9.95. Caterpillar is slightly more volatile with a beta of 1.82 to Deere’s 1.42. Caterpillar also trades on any news out of China because of its mining equipment exposure.

Despite talk of a lost decade in stocks Deere has returned almost 500%, just under what Caterpillar has returned in the same period and that doesn’t include reinvested dividends.

Don’t accuse me of hating on Caterpillar or Titan or Deere. These cyclicals’ day is just on the horizon with what is likely a housing bottom and an upsurge in forestry, turf management and construction. I think that farm equipment is likely to be pressured for a while but Titan’s guidance, although lowered, still maintained that agriculture is strong overall. Hopefully, this year’s drought will become a distant memory sooner rather than later and great American companies like Deere will thrive. I would hate to see the end of America’s small farms and community fairs and hayrides.

Dig Deeper:

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