When Deere & Company (DE +0.65%) was founded in 1837, Andrew Jackson was president, Texas was its own country, and the Civil War was decades away from starting. When Apple (AAPL 0.16%) was founded in 1976, mankind had been on the moon, and the Vietnam War was finally over.
Despite their historical differences and being in starkly contrasting industries, Deere and Apple have more in common as investments than you may realize. Both companies are the leaders in their respective industries and charge top dollar for their premium products. At their core, both companies make hardware, whether that's consumer electronics or equipment and machinery. But they also make software and are investing heavily in engaging with customers even after they purchase new products through aftermarket services.
Here's why Deere is the Apple of agriculture, and why it could be a great stock to buy now.
Image source: Getty Images.
Investing in the industrial internet of things
The industrial internet of things, commonly known as IIoT, is the integration of computers and traditional industrial processes. Think cameras, sensors, artificial intelligence (AI), robotics, automation, etc. For agriculture, this means transitioning from purely mechanical processes like manually operating a tractor by sitting in the cab all day to increasingly automated processes that save time and boost efficiency. A term you may have heard is "precision agriculture." It's been talked about for a long time. Now it is accelerating, and Deere deserves a lot of credit for that.
In January, Deere unveiled a fully autonomous tractor that can function without a person in the cab. The operator can monitor its performance from their phone and intervene when needed. Yes, there's some handholding, as the tractor will just stop in its place if it doesn't know what to do. But to be fair, this is a safer option than having a rogue tractor barreling through your neighbor's fence.
Fully autonomous tractors may be more practical and useful sooner than autonomous passenger vehicles given that there are fewer variables and the vehicle tends to move at a slower speed.
NYSE: DE
Key Data Points
A coiled spring for an agricultural evolution
Deere's operating expenses, capital expenditures, and research and development expenses peaked in 2019 as the company prepared for what would come to be known as its "Smart Industrial Strategy," which was announced in June 2020. Smart Industrial is Deere's push toward a technology-focused approach to its machinery. The company has since received criticism for preventing its customers from fixing their own equipment, as software updates increase dependence on Deere's dealership networks. After all, it is in Deere's best interest if customers rely on it for repairs and services instead of doing it themselves.
Deere has even been caught up in the Right-To-Repair movement, which is focused on shifting aftermarket control away from the original equipment manufacturers to third-party players. Issues like this are common with software. Apple has faced similar debates for decades as some consumers complain that the company retains too much control by forcing software updates even after the product is purchased, which leaves the customer overly reliant on Apple and often leads to paying for new Apple products and services.
Regardless of where you stand on the issue, the reality is that Deere's openness to automation is a great long-term tailwind. The company is attempting to position itself as a leader in precision agriculture and even environmental issues, cutting back on emissions on its massive diesel engines and even incorporating machinery with electric motors.
Deere's results speak for themselves. The company forecasts record net income of $7 billion to $7.4 billion in fiscal 2022. Deere has a market cap of around $96 billion, so its forward price to earnings ratio is under 14. That's an attractive valuation for Deere even if growth slows.
Playing the long game
Just five or so years ago, investors doubted the viability of Apple's services business as a separate revenue stream. Many thought that the services business would inadvertently cannibalize Apple's new product sales by increasing the useful life of older products. Apple proved the doubters wrong. In the six-month period ended March 26, 2022, Apple earned more gross profit from services alone than it did in all of 2010. And that's with services making up around just 29% of total gross profit.
Deere and Apple both build their own software and hardware. Like Apple, which has many stores that double as purchase points and service centers, Deere's dealership network provides customers with access to mechanics that can fix equipment if something goes wrong. If a company wants to control its aftermarket business, it needs the infrastructure to do so. Deere has that in spades.
Agriculture is a traditional industry that will take time to embrace automation. But Deere is making the right long-term investments so that when the tipping point occurs, it will be best positioned to capitalize.
