A Good Stock Is 'Deere' Today

NEW YORK (F.A.S.T. Graphs) -- Ever since blacksmith John Deere invented the first commercially successful steel plow in 1837, Deere (DE) has helped farmers feed America.

Today, true to its legacy, Deere continues to help farmers feed people, but now does it throughout the world. In addition to the U.S. and Canada, Deere operates in France, Germany, Mexico, South Africa, Argentina, Spain, China, Netherlands, Russia, the United Kingdom, India, South Africa, Australia, Brazil, Israel, Finland and New Zealand.

Moreover, the company has expanded beyond agriculture into residential, golf and other sports, commercial, forestry, engines, and even the military. In short, Deere is a worldwide company, which in its own words is "dedicated to those who are linked to the land -- farmers and ranchers, landowners, builders, and loggers."

I bring this all up to illustrate that this is a great company with a 175-year legacy of excellence, a worldwide presence and a valuable long-term investment, with a history of enduring strength and value. As you will soon see, there is a certain amount of cyclicality, in the longer run it's a story of a good, stable business generating growth at long-term above-average rates.

The following 21-year (20 years of history plus the current year) F.A.S.T. Graphs reveals a great deal about John Deere the business, and about John Deere the solid investment. Still, a few words of clarification are in order.

First , the orange line on the graph represents a plotting of earnings per share and a P/E ratio of 24.8, equal to the company's earnings growth rate since 1993. The blue line represents the P/E ratio of 16.2 that the market has typically applied to Deere's shares over that period of time. The light blue shaded area expresses dividends paid out of earnings (green shaded area). The pink line simply plots the company's dividend each year and simultaneously indicates the company's payout ratio, which is everything below the pink line. Finally, the black line represents the company's monthly closing stock prices.

A quick analysis of this graph reveals that Deere is undervalued when the stock price is below the blue line, overvalued when it's above the blue line and historically fairly valued when the price is touching the blue line.

Consequently, on that basis Deere stock is currently significantly undervalued. Since you make your money on the buy side, Deere looks like a very attractive buy for the long-term investor.

There are couple of other important takeaways that the graphic reveals. Clearly, Deere tends to struggle during recessionary times. On the other hand, it's also clear that it seems to recover very strongly. Consequently, this might indicate that both long and short-term profits are to be made as Deere is showing strong recovery following the great recession of 2008, while simultaneously the stock is very attractively valued.

When analyzing Deere's long-term performance, we discover that it has significantly outperformed the S&P 500 on both capital appreciation and total dividends paid. We also see a very consistent dividend record that tends to hold up during and post recession. We also see that Deere is not afraid to raise the dividend when business is strong.

A More Current Evaluation

By focusing more in recent history, I believe we get a better feel for the opportunity that Deere shares represent. The following earnings- and price-correlated graph looks at Deere from 2007 (one year before the great recession) up through the close on May 22.

Here we once again see a very high correlation between the company's earnings record (the orange line) and its monthly closing stock price (the black line). Since the orange line represents fair value based on earnings, we see that Deere is a bargain based on the consensus estimate for this year's earnings of $8.51 per share.

Once again, when reviewing the performance of Deere earnings and price compared to the S&P 500, we see the advantage of owning the stock for the long term. Based on an initial $10,000 investment on Dec. 31, 2006, Deere's dividends paid have been more than double the S&P 500, and the rate of capital appreciation has been over four times the index. Bear in mind that this is at a time when Deere's current P/E ratio is at a significant discount to the markets.

Deere's Future

In spite of Deere's long legacy discussed previously, the company appears to be more focused on their business success, and perhaps more importantly to investors, more shareholder-focused as well.

This May/June 2013 presentation on Deere's Web sitehighlights the company's current shareholder-friendly focus. Slide 16 in the presentation points out the company's emphasis towards a more aggressive dividend policy based on their revised strategy in 2010 (Note: The dividend growth percentage in the performance report above reflects this).

Slide 5 in the presentation highlights Deere's current stated strategy and purpose. Recent operating results indicate that the company is walking the talk. Moreover, its recent earnings announcement on May 15, 2013 provides guidance to their view of the immediate future.

Summary and Conclusion

The stock market has thus far been very strong in calendar year 2013. As a consequence, quality companies that can be purchased at bargain prices are becoming harder to find. However, I believe that Deere meets the criteria of a quality blue-chip at a very attractive valuation with an above-market dividend yield.

At the time of publication the author was long DE.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Charles (Chuck) C. Carnevale is the creator of FAST Graphs.

Chuck has over 43 years of financial experience and is the co-founder of the earnings and price correlated, powerful fundamentals analyzer software tool - FAST Graphs. Chuck holds a Bachelor of Science in Economics and Finance from the University of Tampa. Chuck's work stressing sound valuation has been widely published on numerous financial sites and blogs. Chuck is passionate about spreading the critical message of valuation and prudence in fundamental investing. So much so that regular readers have dubbed him "Mr. Valuation". Chuck is a Veteran of the Vietnam War and was awarded both the Bronze Star and the Vietnam Honor Medal.

Chuck believes that correctly assessing fair value is one of the primary keys of successful stock investing, and he has dedicated his more than 40 years of experience in finance to its pursuit. Chuck agrees with legendary investors such as Warren Buffett, who recognize how important it is for investors in common stocks to possess an intelligent framework for making sound decisions that can keep emotions out of the equation. With making smart stock selections, there is no room for fear and greed.

Chuck was fortunate to learn at an early age that earnings drive long-term stock prices, and that dividends, if any, will be paid out of a company's earnings. This led him to develop FAST Graphs, the fundamentals analyzer software tool that reveals the long-term relationship between a company's earnings and its stock price and dividends over time. Chuck is most interested in the business behind the stock.

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