The "AgSuperBull" Runs Faster With a Deere
Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The most frequent question goes like this: “I like agriculture right now as well, but aren’t smaller caps that are more fairly valued with less debt, better plays?” In particular people have been referencing CNH Global (NYSE: CNH) and AGCO (NYSE: AGCO) and in a word: No.
I Actually Like Both of Those Companies.
Here’s two reasons that people think these stocks are a better buy than Deere. In most cases I would agree—I’ll explain why I don’t in a moment.
Both CNH and AGCO are more “cheaper” than Deere by most traditional metrics. They have a lower P/E (8.92 and 7.10, respectively) than Deere does at 11.78. They also trade at more attractive price to sales ratios (around 0.5 each) than Deere does (around 1), so it’s fair to say that you get a better value for your sales growth with both CNH and AGCO.
Simply put both companies are smaller than Deere and have more markets to grow into, they haven’t achieved Deere’s scale yet which leads many investors to feel they have more room to grow today. CNH has a market cap of $10.10B and AGCO has a market cap of $4.95B, while Deere’s market cap eclipses $34B.
Socioeconomic Trend Investing Rule #1: Know Why You’re Buying
There is no one size fits all solution.
Simple metrics like P/E or P/B aren’t don’t point you to the “pot of gold” in every scenario. Investing is too complicated with too many variables; if it were that simple there’d be a heck of a lot of millionaires. With respect, the reason Deere is superior to AGCO and CNH is simple: they’re not selling “iPods”.
To be bullish on Deere is to be bullish on a trend, one that says the world is getting harder to feed with harsher weather conditions and a global population surging to 7 billion hungry mouths. That’s what’s going to make you money; not P/E’s, but the socioeconomic trend behind Deere—let’s call it the “AgSuperBull” (trademark, jk).
You see if Deere was a consumer facing stock with “direct to consumer” products then absolutely, you’d want the smaller cap with more markets to expand into. If this were Chipotle for instance it would make sense to be more bullish on it than McDonald’s because it has vast overseas growth ahead of it—you’d probably also want the restaurant with faster current sales growth.
That’s not the “AgSuperBull,” this bullish idea is formed from an edge or it shouldn’t be formed at all. The edge you have says that tomorrow will look different from today and if this thesis holds true then the demand will not come from consumers directly but from the pain that farmers feel (due to increases in crop prices).
If demand pops like we hope (like the snap of your fingers), then it’s only reasonable to assume that those in pain will go for the easiest solution to fix that pain. The pain will lead customers to the trusted brand with nearly 200 years of experience and a world-wide distribution network with reliable products that are second to none. The clients who are global (and many will be) will also want to know they can get the same quality product in Springfield that they can in Shanghai. In short—nothing will run like Deere.
Considering This There’s Still a Better Play in Agriculture Than AGCO and CNH
If Deere’s price metrics seem scarier than AGCO or CNH’s, then Monsanto’s (NYSE: MON) are that of an “ag slasher flick. Monsanto has been “overpriced” all year; its high P/E (25.45) and terrible P/S (3.77) are only matched by its atrocious P/B (4). Yet, it keeps surging higher from 69.70 to a current high of 96.71—like Deere, it’s at its 52 week high right now.
When you see a stock shooting higher in the face of all reasonable metrics, you should at least ask yourself “why?” Monsanto is the largest producer of seeds ranging from corn to cucumbers and if you see “tomorrow” like I do, then the population growth alone will make current growth estimates seem miniscule. Even better, Monsanto sees “tomorrow” our way and has built a ridiculous lead on any competition when it comes to “seed science”. Yes, Monsanto is modifying and perfecting seeds to make them more resistant to drought and hostile farming conditions.
Growing population + “roughneck” seeds + hostile conditions=one heck of a head start!
The AgSuperBull: Pick the Best but Most Will Win
Investing is about minimizing risk. When you truly believe you’re on the right side of a trend you take a heck of a lot of risk away, to be sure I believe that the “AgSuperBull” will lift most boats.
Certainly CNH and AGCO will benefit but the scale of these companies (especially AGCO’s) will put them at a disadvantage to Deere, even amidst Deere’s questionable debt load.
Deere and Monsanto are not the most attractive stocks in this space by valuation but they’re the best positioned to capitalize on this trend and win “tomorrow”—period.
Adem Tahiri owns shares of Deere & Company and Monsanto Company. 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!