Before the Call: Deere in the Headlights

Between the boom in corn ethanol and the growing world food shortage (!), it's been good to be Deere (NYSE: DE) these past few years. The company hasn't missed an earnings estimate since late 2005 -- but how long can the good times last? Tomorrow, we learn how Deere's fared through the first half of its fiscal year.

We'll have time aplenty to dissect the specific numbers after Deere's second-quarter news comes out. But before we begin obsessing over its short-term progress, let's use these last few hours to review what investors think about Deere as a long-term investment. Our tool in this endeavor: Motley Fool CAPS, where we poll more than 100,000 investors for their views on more than 5,600 companies, including Deere. Here's what Fools have to say about the company and its long-term prospects.

Up or down?
More than 1,700 investors have submitted ratings on Deere. Their verdict: Go green!

96% of CAPS players polled expect Deere to outperform the market, good enough to earn this company a full plate of five stars on CAPS. Then again, optimism runs rampant in this sector:

Wall Street vs. Main Street
Wall Street's right there with Main Street on this one. Of the eleven analysts who've taken affirmative buy/sell positions on the stock, the voting runs 10-to-1 in Deere's favor. (Little wonder. Deere's crushed the market this past year, outperforming the S&P 500 by a good 56 points.)

Bull pitch
CAPS All-Stars have a particular fondness for Deere, so I'll pull today's pro-Deere argument from their ranks. MarkBDow does a fine job of summing up the bull thesis here, in a post dating from last March:

Production of corn alone will increase substantially over the next few years as investors seek to reap the benefits of the governmental push for ethanol production and utillization. Anticipation of profits will result in producres investing in new farming equipment. As more acres of corn are planted, producers of other marketable farm commodities will be able to increase prices because of a resulting relative scarcity. Those farm profits, real or anticipated, will also result in additional investment in new farm equipment. Deere will do very well in this environment.

Bear pitch
Pretty clear thesis there. Thanks, Mark. In contrast, I have to admit that the top-rated anti-Deere pitch goes right over my head -- but maybe some of you out there will find this useful. Posting in June 2007, wcwhiner argued:

My going macro thesis is that "soft landing" includes both the word "soft" and the word "landing". Since machinery has been run up nicely as the first word in the phrase has started sinking into the market's consciousness, I decided to fade a couple names. If there is a risk at current prices, it is of more landing than expected. Reversal plays are always dicey, but I shall want to ride these ideas until I start seeing a renewed upswing in the data (and no, flat nonfarm payroll per population is not a "renewed upswing").

What I think wcwhiner is saying, if more eloquently than I, is that Deere is expensive. The stock has run up a lot, and outperformed the broader markets. But eventually, all companies revert to the norm -- cyclical industrial firms like Deere moreso than the rest.

Whether or not that's wcwhiner's point, I personally agree with it. Right now, Deere trades for a P/E of 21 -- which may not seem expensive, until you notice two things. First, most analysts don't expect this company to continue growing much faster than 11% per year over the long term. Second, Deere's not nearly as cheap as it seems. While the company has racked up close to $2 billion in profits under GAAP over the past year, its cash flow statement shows that only $1.2 billion of that is supported by cash profits.

With the stock now priced at 32 times trailing free cash flow, I have to side with the bears today -- but Deere? Feel free to prove me wrong tomorrow.

Who said that?
To learn more about the wise Fools who penned these words, examine their records (and see whether they know whereof they speak), and to explore the plethora of additional financial data we've put together on the company, just click here.