Streetwise
Lauren Rudd
Sunday, April 7, 2013
Do Not Let Greed Play A Role
Few would be surprised if Webster’s added Wall Street to its
definition of greed. Not to ruin your day but the financial markets have always
been driven by greed. Furthermore, the wealthiest among Wall Street’s finest are
often the greediest. This is no sudden epiphany; it has been so throughout
history.
Yet, 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 Dow Jones Industrial Average.
Rather you are creating partnerships with a minimum of 12 to
15 high quality dividend paying companies (hopefully), whose self-projected
future success coincides with your analysis. And it is especially helpful if
they are under appreciated by Wall Street. Or to quote the philosophical wisdom
of Warren Buffett, the time to buy anything, particularly stocks, is when they
are on sale.
A good example of a company whose shares are on sale, while
at the same time having the honor of once being the central theme of a number
one song on the country music charts, is none other than Deere (DE). The song of
course 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 is also a company that I have received numerous inquiries about from both
readers and students. When I wrote about the Company a year ago, my earnings
estimate for FY 2012 was $7.75, with a 12-month target price on the shares of
$94 for a capital gain of 15 percent. While earnings were lighter than my
estimate, coming in at $7.63, the shares did reach $94.65 on February 1 of this
year.
Although February would have been an excellent time to take
some money off the table, if you did not or never bought the stock to begin
with, do not despair. The recent pull back to the $85 level has created an
opportunity to consider this Company as a possible investment candidate that is
on sale.
Let’s do a bit of analysis. For fiscal 2012, earnings hit a
record $3.065 billion or $7.63 per share, as compared to $2.800 billion, or
$6.63 per share in 2011. Meanwhile, sales increased 14 percent to $9.792 billion
for the fourth quarter and increased 13 percent to $36.157 billion for the 2012
fiscal year.
Moving ahead to the first quarter of fiscal 2013, earnings
were $649.7 million or $1.65 per share, as compared to $532.9 million or $1.30
per share during the same period in 2012.
Revenues for the first quarter increased 10 percent to $7.421
billion, as compared with $6.767 billion a year ago. With 11 consecutive
quarters of record earnings, Deere has begun 2013 on a positive note and is
setting the stage for another prosperous year.
To that end, Deere remains well-positioned to earn solid
profits despite a fragile world economy and will benefit longer term from the
latest on-going trends in global farming.
The days when the only thing a farmer needed was a sickle and
a strong back are long gone. The continually increasing demand for food requires
that farmers plant, maintain, and harvest more efficiently. And there to help is
Deere.
Despite a 175 year history, Deere can best be described as a
new unfolding story of rapid growth. Perhaps its most exciting goal is to
achieve sales of $50 billion by 2018. That would mean a near doubling in size
over the next five years. An extraordinary feat no doubt, but it is one that
fits neatly into the current trend of global growth in farming.
Looking at Deere’s intrinsic value, a discounted earnings
model suggests an intrinsic value of $119 per share utilizing a 12 percent
discount rate and a 9 percent growth rate. The more conservative free cash flow
to the firm model returns an intrinsic value of $217 per share using a discount
rate of 7.31 percent, which is the Company’s weighted cost of capital.
My earnings estimate for Deere in FY 2013 is $8.76 with a projected 12-month
share price of $98, yielding a capital gain of 15 percent. There is also a 2.4
percent dividend yield.