Buy John Deere, Just like Warren Buffett
Sean is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warren Buffet has been shuffling around some of his investments lately, selling holdings in companies like Johnson & Johnson, Kraft Foods, and Procter & Gamble. In turn he has been increasing Berkshire Hathaway’s (NYSE: BRK-A) stake in IBM, Wells Fargo, and other investments into new companies.
One of the new companies Buffett has added to the portfolio is John Deere (NYSE: DE). Buffett is a notorious long term investor and sees an opportunity in John Deere. His Berkshire Hathaway company has purchased a $340 million stake in Deere, roughly 1% of the company.
Like Warren Buffett, I believe John Deere is a good long term investment. Let me explain why.
Firsts of all, Deere has strong growth potential over the next year as its orders for harvesting combines, crop sprayers, and high horsepower tractors are sold out for the beginning of 2013. In fact the crop sprayers are nearly sold out for the entire year.
Maxing out production capability is a great problem to have, and indicates that Deere has both a high demand for its products and the opportunity to expand production to satisfy that demand.
Second, such strong demand bodes well for John Deere’s future. In fact, based on these orders, Deere expects revenue in 2013 to rise 5% and earnings to rise 3.2%. Deere has such high expectations for 2013 that it expects to beat analysts’ first quarter equipment sales expectations by seven percentage points!
Third, the market has shown strength and resilience to the drought this past summer. There was a lot of worry back in the early summer that the drought would decrease farmer's buying power and reduce purchases of farm equipment. Based on those worries, Deere stock lost about 20% in the early summer. The stock has since recovered as it has become apparent that the drought did not reduce equipment purchases.
Some analysts even believe the drought has actually improved demand for the machinery. The drought caused prices of commodities such as grain to rise, which benefits the farmers who have grain and those impacted by the drought were protected by crop insurance. Thus the negative impact of the drought was minimal to non-existent.
Fourth, John Deere is also doing very well in comparison to its competitors. Its gross margin is better than that of Caterpillar (NYSE: CAT), CNH Global (NYSE: CNH) and Kubota (NASDAQOTH: KUBTY). Deere’s quarterly revenue growth is also good, beating both Caterpillar and CNH Global, and is only one point lower than Kubota. Its operating margin is likewise better than two out of three of these competitors and only one point behind Caterpillar.
Finally, Deere posted good fourth quarter growth with sales of farm and construction machinery rising 26% in North America. Income from farm equipment rose 7% and income from construction and forestry equipment rose 38%.
There are a lot of positive indicators for John Deere, but granted there are still some negatives as well. Sales outside of North America fell 2% in the last quarter and its fourth quarter profit was not as high as analysts would have liked. Analysts’ were hoping for a profit of $3.3 billion, but instead Deere posted a profit of $3.2 billion even with a higher than expected sales figure.
The lower than expected profit was in part due to a $33.4 million write down in one of its equipment segments.
These negatives are worth considering, but I believe they are far outweighed by the robust North American market. John Deere is a viable long term investment. This isn’t a company that is going to post astronomical growth. It won’t have stock performance like Apple. But it is a company that can be counted on to grow and be profitable as it meets the strong demand for its equipment.
The long term demand and growth is something that Warren Buffett recognizes.
SeanMSullivan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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!