Streetwise for Sunday, March 18, 2018
The Street’s recent volatility should not be an impediment to your search for investment bargains. There are always opportunities for investment. Yes, price is absolute, but value is relative.
A good example is Deere & Company (DE). Deere is the world’s largest manufacturer of farm machinery. And it is on Ethisphere Institute’s list of most ethical companies.
When I wrote about the company a year ago, my 2017 earnings estimate for Deere in FY 2017 was $5.20 with a projected 12-month share price of $121, yielding a capital gain of about 10 percent, plus the indicated dividend yield of 2.17 percent. So how did the company do? Earnings came in at $6.68 per share, while the shares recently closed at $161.12.
You must hand it to Deere’s management. Not much has gone right with farm receipts declining since 2014. However, the company’s management continues to defy the doubters. Nonetheless, Deere is rarely mentioned on any financial news network because farm machinery is boring; unlike electric cars or social media. However, boring can be lucrative.
Deere is a cyclical company driven in part by farm income. And in the past thirty-five years’ farm income has fallen on six separate occasions, with the average decline being 32 percent. However, in the past when farm income has fallen precipitously, it has snapped back the following year by an average of 51 percent.
At the same time, Deere has an outsized exposure to the North American replacement cycle and a potential rebound in corn and soybean prices. Of note is that Deere has looked to acquisitions to assist in its growth objectives.
The company recently entered into an agreement to acquire King Agro, a family-owned business with headquarters at Valencia, Spain, and a production facility in Campana, Argentina. The company is a privately-held manufacturer of carbon fiber technology products that has targeted innovative designs that improve productivity and lower costs.
Deere’s history with King Agro began in 2015, when both companies decided to develop and distribute carbon fiber booms for Deere’s application equipment in agriculture. The deal offered significant advantages of carbon fiber’s versatility, strength and durability in self-propelled spraying equipment to growers.
Because of the merger, Deere will benefit from King Agro’s unique knowledge, designs, and expertise in carbon fiber technology. However, King Agro will retain its brand name, trademark, and commercial relationships.
Last December the company acquired Wirtgen, a leading global road-construction equipment maker for $5.2 billion in cash and debt, which will enable Deere’s North American construction business to expand globally and catapult it to the position of an industry leader in road construction.
Last September saw Deere acquire Blue River Technology, a California based pioneer in applying artificial intelligence to the arena of agricultural spraying equipment. Blue River’s technology has aided precision agriculture by shifting farm-management decisions from the field level to the plant level.
Finally, Deere is poised to gain from increased housing starts, stabilizing oil prices and strong order activity
Historically, Deere has outperformed its industry with respect to price performance in a year’s time. The stock has appreciated around 38 percent, while the industry has recorded growth of 32 percent during the same time frame.
Deere’s intrinsic value, using the ValuePro.net discounted free cash flow to the firm model, after updating certain parameters such as revenues, shares outstanding, and operating profit margin, along with a risk-free rate of 3 percent, is $303.
My earnings estimate for Deere in FY 2018 is $9.20 with a projected 12-month share price of $185, yielding a capital gain of about 14.9 percent, plus the indicated dividend yield of 1.43 percent.
If you are looking for a play on the rebound in the agriculture sector, plus a play on the possible infrastructure build-out in the United States, Deere might be one to keep on the short list.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.