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.