Streetwise for April 7

Streetwise for Sunday, April 7, 2013

 

 

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.