Why Deere Stock Is A Great Buy For A Rich Retirement (NYSE:DE)

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Speculative stocks can be fun while the music is playing, but you don’t want to be left still standing when the music stops. Such has been the case with many SPACs that are now down by more than 50% since their all-time highs.

That’s why it pays to invest in “Great American” companies that have been around for a long time and most importantly, actually make real profits. In the words of Jeremy Siegel, it’s a classic case of the “tried and true versus the bold and new”.

This brings me to Deere & Co. (DE), which fits the mold of a great American company. In this article, I highlight what makes DE an attractive buy at present, so let’s get started.

Why Deere Is A Great Buy For A Rich Retirement

Deere & Co. is the world’s largest manufacturer of farm tractors and combines, and a leading producer of construction equipment. It’s divided into four business segments, product agriculture, small agriculture & turf, construction & forestry, and John Deere Capital, its retail and wholesale financing arm for customers and dealers.

Deere benefits from advantages of scale and a wide distribution network, with 1,900 dealer locations in North America, and 3,700 locations globally. Deere has also been around for over a century, and over this time, has built a reputation as a pre-eminent manufacturer of a comprehensive and mission-critical portfolio of agricultural brands, making it one it one of the world’s most important brands.

The value of Deere’s innovation and comprehensive solutions is highlighted by Morningstar, as shown below:

The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the farming process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and spacing and customized spraying applications. Deere is committed to expanding customer offerings and providing value-added services.

This has enabled Deere to charge premium pricing for its products, backed by its quality, reputation, and track record of customer service. This is reflected by DE’s A+ grade for profitability. As shown below, DE’s EBITDA margin of 21% sits well above the 13% sector median, and it generates a healthy 13.6% net income margin, more than double that of the sector median of 6.4%.

DE Stock Profitability Grade

Deere Profitability

Seeking Alpha

Deere is demonstrating strong business performance, with net sales rising by 19% YoY during the fourth quarter (ended Oct 2021). This was driven by strong demand for Deere’s equipment, and DE is also performing well internationally, with non-U.S. sales growing by 16% YoY.

The current “up-cycle” in demand for farming and construction equipment has done well for margins. As shown below, DE’s operating margin has improved from ~11% in 2019 to 17.2% over the trailing 12 months, and CFRA expects DE’s equipment operating margin to improve to 17.7% in FY 2022.

Deere operating margin

Deere Op Margin

YCharts

Looking ahead, Deere should benefit from continued strong demand for farm and construction equipment as a result of positive economic fundamentals, crop prices, and infrastructure spending. This is supported by management noting the robust uptick in digital usership and engaged farmland acreage in Europe during the recent conference call:

More recent product introductions such as ExactRate Planners and the X9 combine saw significant increases when compared to last year, while our premium and automation software activation take rates are over 85% for our 8 Series and 9R Series tractors. Additionally, we saw significant increases in customer engagement with our digital tools in 2021.

Engaged acres now stand at over 315 million acres, due in part to a sharp increase in Europe, where the number of engaged acres has doubled over the past year. Likewise, use of our digital features such as Expert Alerts and Service Advisor Remote has increased by about 30% compared to last year.

Meanwhile, DE sports a strong A rated balance sheet with $7.4B in cash on hand, and a net debt to EBITDA ratio of 4.6x, sitting well below the 8.1x from FY 2019. While the 1.15% dividend yield is low, it comes with a safe 19% payout ratio, and a 5-year dividend CAGR of 10%.

Notably, DE should be regarded as a total return story, as management has been rather aggressive with share buybacks. As shown below, DE’s share count has been reduced by 25% over the past decade.

DE shares outstanding

DE Shares Outstanding

Seeking Alpha

Risks to Deere include supply chain disruptions and constraints, which may impact the company’s ability to meet demand. In addition, China could pull back on agricultural imports, weakening global demand for crops, thereby putting stress on Deere’s customers. Lastly, increased competition from the likes of Toro (TTC) could pressure margins and sales growth.

Having said that, I see value in Deere’s business model. The investment firm Baird recently expressed optimism around DE as the analyst sees improving agricultural fundamentals and sees momentum around Deere’s ag technology innovations, including its introduction of a fully self-driving tractor at the CES consumer electronics show. Baird raised its price target on Deere stock from $425 to $427.

As such, Deere appears to be reasonably valued for growth at the current price of $364 with a forward PE of 16.4. This is considering the 47.5% EPS growth that analysts expect for fiscal year 2022. Seeking Alpha’s Quant has a Buy rating and sell side analysts have a consensus price target of $412, implying a 14% total return including dividends.

Deere stock analyst rating and price targets

DE Stock Rating

Seeking Alpha

Investor Takeaway

Deere & Co. has a moat-worthy business and is representative of a great American company with its strong brand and reputation as a leading agricultural and construction machinery manufacturer. Its business is seeing robust fundamentals in the current upcycle as global demand has ramped up. Looking forward, it should be able to keep up its momentum with digital offerings as it seeks to evolve its product line. I see value in DE at the current price for potentially strong long-term returns.

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