Buy This Stock for an Economic Recovery!

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

The US economy is showing signs of recovery, with increasing infrastructural activity. The Fed recently announced that it would be buying $45 billion worth of long term treasury bonds every month, in addition to the monthly buying of $40 billion worth of mortgage securities. These monthly liquidity injections in a low interest rate environment would further kick up infrastructure projects. Additionally, China’s $156 billion worth of infrastructure development plan would further contribute to new construction. Indian infrastructural activity is also showing signs of recovery, which altogether presents a bullish case for mechanical equipment providers like Deere, Joy Global, and Caterpillar.

Reasons to Love Deere & Co.

Deere (NYSE: DE), just like all fertilizer manufacturers, is expected to benefit from the drought that destroyed a major chunk of North American crop yield. This shortage in supply drove up crop prices, and the crop prices are expected to stay at inflated levels in 2013 until the supply catches up with the demand. Management said, Driven by strong crop prices, 2012 forecasted cash receipts of $38.8 billion is a record level. In 2013, strong crop prices are expected to continue and livestock receipts are forecasted to increase, spurring 2013 cash receipts even higher.

Moreover, the company will be hiring 5,000 new employees due to fattening order book. The management announced that favorable government policies in Brazil, allows higher financing at lower interest rates.  The company would be constructing two new facilities in Brazil and one in China. This would save overseas shipping costs, and give the company access to cheaper labor. I believe that 5-10 years down the line, if the Brazilian and Chinese manufacturing facilities continue to perform well, management may consider expanding these facilities in order to cater to overseas shipments.

Management also said that paying out common stock dividend is on its priority list, and that it wants to gradually increase its payout ratio to 25% - 35%. At the CMP, shares of Deere yield 2.04%, with a modest payout of 23.15%. A payout ratio of 35% would boost its yield to 3.1% at the current market price.

Don’t Be Over Joyed

The investment thesis of Joy Global (NYSE: JOY) is not that persuading. The company derives a significant chunk of its revenues from coal. Coal accounts for 90% of its underground business revenues.

Due to lower natural gas prices and increasing environmental concerns, natural gas is being considered as a cheap and eco-friendly alternative for coal. Moreover, the recent public upheaval in China over its toxic air quality would force the Chinese to shift to natural gas fired power plants. Additionally the ban on over 200 Indian coal mines, by its Supreme Court has created a coal shortage in the country, and steel manufacturers are either importing coal or cutting down their production. This would also push the Indian government to shift to natural gas fired power plants. These transitions may happen over the longer run, but the gradual shift would eventually put negative pressure on Joy Global.

Foolish Wrap Up

When we talk about mechanical equipment, Caterpillar (NYSE: CAT) can’t be forgotten. But the company has been recently downgraded by JP Morgan and RBC Capital Markets due to President Obama’s energy policy, and analysts expect its EPS to shrink by 4.7% next year.

In my opinion, as of now, Deere offers higher growth potential compared to Caterpillar and Joy Global. Moreover, shares of Deere have outperformed its peers over the last year, and analysts expect its annual EPS growth to average around 9.4%. Altogether, Deere makes a great investment choice and it gets a Foolish Buy Rating.

 
 


PiyushArora has no position in any stocks mentioned. The Motley Fool owns shares of Joy Global. 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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