Streetwise

Lauren Rudd

Sunday, April 8, 2012

Run Like This Deere

Yes, for many Wall Street has a bit of a sullied reputation. Actually, few would be surprised if Webster’s listed Wall Street as part of its definition of greed. Not to ruin your day but the financial markets have always been driven by greed, as are most markets. Furthermore, the wealthiest are often the greediest. This is no sudden epiphany; it has been so throughout history.

However, the Street’s antics should not be an impediment to your investment decisions. If you have not already done so, now is time to step up the bar and take responsibility for your financial future. Keep in mind that when you invest in individual stocks you are not buying the market; or Wall Street or the continually touted Dow Jones Industrial Average.

Rather you are, hopefully, creating partnerships with approximately 12-15 high quality dividend paying companies whose projected future success coincides with your analysis of their prospects. And it is especially helpful if they are under appreciated by Wall Street.

A good example is a company with the honor of having been the central theme of a number one hit on the charts of country music. If you have not guessed, the company is Deere (DE) and the name of the song is “Big Green Tractor,” written by Jim Collins and David Lee Murphy and recorded by Jason Aldean.

Deere is the world's largest manufacturer of farm machinery. It has also fostered a fast-growing construction and forestry business. As a result, Deere can point to seven straight quarters of record earnings. At the same time the Company trades at a price to earnings (P/E) ratio that is 25 percent below that of the broad market. And it has been increasing its dividend by 14 percent for five consecutive years.

Deere is expanding in both agriculture and construction, while maintaining its dominant market position within the farm equipment industry. Its single-A credit rating makes it easy for Deere to fund its financing arm, which accounts for about 7 percent of revenue. Yet Deere still lacks recognition from Wall Street.

For its fiscal year ended Oct. 31, Deere posted a 52 percent increase in earnings per share to $6.63, on revenues of $32 billion, a revenue increase of 23 percent over the previous year. Sales were driven by a 21 percent increase in agriculture and lawn care, along with a 45 percent increase in its construction and forestry divisions.

Looking at Deere’s first quarter ended January 31, net sales increased 11 percent, which included price increases of 4 percent and an unfavorable currency-translation effect of 1 percent. The Company’s operating profit was $698 million, as compared to $646 million a year ago. Although that result benefited from both price increases and higher shipment volumes, it was partially offset by increased production costs related to new products and more stringent engine-emission requirements, as well as higher raw-material costs.

Trade receivables and inventories ended the quarter at $9.011 billion compared with $7.416 billion last year. The financial services division reported net income of $119.1 million for the quarter compared with $118.2 million a year ago.

After it reported record results for its fiscal first quarter, Deere raised its construction and forestry sales growth guidance by two percentage points, to 18 percent, while maintaining its agriculture and turf sales forecast at 15 percent. The company also raised its net income guidance by $75 million to $3.275 billion. Overall sales for 2012 are projected to increase by about 15 percent.

A discounted earnings model yields an intrinsic value of $113 per share utilizing a 15 percent discount rate and a 12 percent growth rate, while the more conservative free cash flow to the firm model suggests an intrinsic value of $187 per share, using a discount rate of 7.72 percent, which is the company’s weighted cost of capital. The shares recently closed at $81.75.