As of the end of October, the company had a trailing-12-month operating margin of 14.5%. Its TTM return on equity is an impressive 41.3% and its year-over-year quarterly earnings growth as of the end of the last quarter was an encouraging 17.3%. No company is perfect, and the outlook for Deere isn't without concerns.
In the U.S., agriculture commodities have been dampened, led by lower grain prices. Some level of lowered government subsidies and tax incentives may also affect sales. That's probably one of the main reasons that analysts on average are predicting about a 4% drop in sales growth and revenue for the current fiscal year.
The same community of analysts estimates that earnings-per-share will be up an average of 18% for the current year. The company has guided for lower revenue and sales growth in the current fiscal year of about 8%. That in combination with an estimated 7.27% EPS drop during the current quarter and there's room for an upside surprise when the company steps into the earnings confessional on Feb. 10, 2014.
The share price has jumped from $82.20 on Dec. 3 to almost $89 per share by Dec. 10, meaning over an 8% rally in just one week. That has been partly due to a flurry of positive articles in the financial media including one by Sham Gad at Real Money who wrote on Dec. 9th, "In my opinion, Deere is the highest-quality stock in the market today, trading for a single-digit P/E ratio. History has confirmed over and over that financial setbacks for Deere create opportunities for investors. In 2009, net profit fell to $1.2 billion, from $2 billion in 2008. The stock fell to $24, and over the next several years it rallied to nearly $100."
Warren Buffett's Berkshire Hathaway (BRK.B) owns shares, and it wouldn't surprise me if Mr. Buffett or some activist investor with billions to invest may goose the share price higher if it doesn't go up enough on its own.
According to Deere, the macroeconomic "tailwinds" that the company is counting on for its future growth include the forecast that, "By 2050, the world's population is expected to expand to 9 billion people. We're at more than 7 billion today. That growth will come mostly from emerging economies, such as China and India, where incomes are increasing, and diets improving. An increased demand for food, fuel, and fiber will require an approximate doubling of agricultural output in that timeframe."
Deere expects the continuation of "migration from rural areas to cities. In 2010, for the first time in history, over 50% of the world's population lived in cities. By 2050 that number is expected to reach 70%. A smaller labor pool in rural areas creates the need for more mechanized farming, as manual labor is replaced by more productive equipment solutions. Increasing urban populations also creates the need for housing, roads, bridges, and other infrastructure investments." Hence the need for more of what Deere does best with its interrelated businesses.
Shares of Deere may not be "asleep" for long so. It may be prudent to begin accumulating them on any pullbacks. I'd encourage you to establish a trailing stop loss (one of the most valuable secrets of investment success) to limit your downside risk.
The one-year estimated price target by the analysts who cover Deere was about $86.16 per share, and so perhaps shares have gotten a little ahead of themselves of late, or perhaps the smart money knows that this stock won't be a sleeper for very much longer.
At the time of publication, the author had no positions in the stock mentioned.