Deere: Undervalued Sleeper for 2014

NEW YORK ( TheStreet) -- What mental image comes to your mind when you see the words Deere & Company ( DE)? Maybe it's the green and yellow emblem of a stag deer jumping, or perhaps it's a green tractor working the fields on a large, commercial farm. What probably doesn't come to your mind are the words, "solid, reasonably priced, long-term investment."

Well, Deere should conjure up those words, even though many look at it as a stodgy stock now and for 2014. In fact, the company wants the investor community to know that it sees itself as opportunistic.

The company's investor relations website also wakes us up about this "sleeper" by stating, "Technology advances and continued agricultural mechanization will open and expand markets. John Deere is uniquely positioned to capitalize on these economic tailwinds. And, just as important, we're in a position to make a difference in the world by supporting a higher quality of life."

Why would an investor want to invest in Deere now? Is it just the 2.37% dividend you'll receive if you don't pay more than $86.16 per share for the company's stock? Or is it that it's trading at a current price-to-earnings ratio below 10 and a forward (one-year) PE of less than 12? The answer is both and more.

Managing a Strong Portfolio of Interrelated Businesses.

Did you know that Deere owns a bushel of interconnected businesses? Each business has it own vital and specific role. The company explains them as follows:

Growth businesses (Agricultural and Construction equipment solutions) are in the best position to capitalize on global growth and development created by these economic trends. Management expects this segment to success as it addresses the challenges of increased agricultural output and infrastructure.

Complementary businesses (Turf and Forestry equipment solutions) - support and enhance worldwide channel development. They defend and grow market share in specific, targeted markets, while seeking to enhancing Deere's financial performance.

Supporting businesses (Financial Services, Power Systems, Parts Services, and the Intelligent Solutions Group) strengthen and differentiate Deere's other equipment solutions.

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.

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



Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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