Was Mr. Buffett Correct On Deere?

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

On Nov. 21, I published an article on Warren Buffett's recent investment. In a recent filing, Berkshire Hathaway (NYSE: BRK-A), the famous holding company, disclosed a sizable stake in Deere (NYSE: DE), the famous maker of agricultural and farming equipment. On the face of it, this investment is unbelievably unexciting and doesn't seem to belong with other iconic names such as Coca-Cola (NYSE: KO) and Procter & Gamble (NYSE: PG). But there's a big catch.

Why Deere?  

I gave a few reasons as why Deere may present an excellent opportunity to ride on the strong upcoming farming trend. There I elaborated on a few reasons such as a great business moat, consistent increase in dividend payouts and outstanding track record of profitability over the years. On Feb. 13, Deere reported its 1Q 2013 results. This gives us an excellent opportunity to see whether the company is in line with our high expectations of it.

Time to show the cards

Deere reported earnings of $650 million compared with $533 million earned in the prior-year quarter. That is an impressive increase of 22% in earnings. The company blew analyst expectations away with an EPS of $1.65 versus estimates of EPS of $1.41. But this increase in earnings didn't come at the expense of profitability. Deere stated that operating profit improved 8% year over year to $1.27 billion in the quarter. Such a high rate of increase in profitability is especially impressive in a $35 billion market cap company.

Where are we heading from here?

The company has invested in expanding its presence abroad, and has been building capacity in China, India, and Brazil and continued to roll out new products. The company guided its investors on a few key market points heading into 2013.

  1. The gross value of agricultural production in Brazil is expected to increase by 9% in 2013. This is a direct result of the increase in commodity prices as well as in organic demand from local farmers.
  2. Global sales of equipment operations are expected to produce $3.4 billion of free operating cash flow in 2013. That is an astounding 140% increase from only 3 years ago.
  3. In Q1 2013 alone, the company purchased and retired 1.1 million of its own shares. Under current share buyback program, it still has $2.5 billion remaining to continue and retire many more shares.  

Buffett and Deere

Deere fits in Berkshire's portfolio of consumer stocks. On the one hand, it's very different from other typical iconic consumer stocks like P&G and Coke. The former appeal to the general public, whereas Deere has a very specific niche class of consumers (farmers). This creates even more loyalty and brand power among Deere's consumers. In addition, Deere is about half as expensive as the other two: Whereas Coke and P&G trade at a P/E of 20x and 18x and price/sales of 3.5 and 2.5, respectively, Deere trades at a P/E of less than 10x and price/sales of less than 1. 

But it's not only the valuation; it's basically a growth story. Coke, for instance, increased its revenues and EPS in 2011 by a remarkable 32% and 20%, respectively. In 2012, though, it's going to slow down significantly to 3.3% and 7%, respectively. Even P&G, a much smaller company than Coke, managed to increase revenues and EPS by only 2% and 11% in its past fiscal year. Neither one of these two iconic companies is even remotely close Deere's recent 22% jump in earnings per share.

The Foolish bottom line

Given the increased global demand for food, shelter and infrastructure, I believe that the long-term outlook for Deere remains strong. Deere's latest report only proves that it's on the right direction to be a world leader in its field, just like P&G and Coke are in theirs. And this, exactly, is the greatness of Mr. Buffett.

 


shmulikarpf has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and Procter & Gamble. 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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