Deere & Co. (DE): ‘Equipped for Growth’
June 27th, 2011 | by Alexander Zepps |
“Rising demand and constrained supplies are a recipe for higher agricultural prices,” notes Elliott Gue.
The contributing editor to Personal Finance explains, “The big winners are commercial farmers and companies whose products enhance crop yields. And one company equipped for growth in this market is Deere & Co. (DE), a new addition to the our model Growth Portfolio.
“For nearly 175 years, Deere has manufactured a wide range agricultural equipment, including tractors, combines, harvesters and sprayers.
“The company’s profits hinge on farm cash receipts: Farmers are more likely to upgrade equipment or purchase expensive items when their incomes are on the rise.
“The US Dept of Agriculture (USDA) estimates cash receipts among US farms will total $340 billion in 2011 — up more than 9 percent from 2010 and surpassing the previous record of $318.3 billion, set in 2008.
“Deere’s internal forecast trumps the USDA’s projection, calling for US farmers’ cash receipts to exceed $351 billion this year.
“With a more than 50 percent share of the domestic market, Deer will reap the rewards of soaring US farm incomes.
“Not only were the company’s US sales up a whopping 13 percent in 2010, but management also expects domestic revenue to shoot to a new high in 2011.
“Over the long term, Deere’s leading market position will prove a huge competitive advantage, as the US is a top producer and exporter of key agricultural commodities.
“But the company’s growth story isn’t solely made in the USA. Management plans to grow overseas sales so that business outside of North America accounts for more than 50 percent of the company’s revenue, up from about 40 percent in 2010.
“Deere should be able to reach this target within the targeted eight years. The firm continues to expand aggressively in Brazil and other South American markets; in 2010 sales from the region jumped nearly 50 percent to a record high.
“Deere is already the largest exporter of tractors to India. And Russia is also in Deere’s sights, as more than two-thirds of Russian farms lack modern agricultural equipment.
“Deere’s stock trades at 12 times the consensus earnings estimate for 2012, a reasonable valuation for a firm that could grow net income at a 15 percent annualized clip over the next few years. Deere & Co. rates a buy under 100.”
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