A lot of the investment discussion surrounding artificial intelligence (AI) and automation has focused on the semiconductor industry and the tech sector. But the industrial sector is flush with opportunities -- particularly through companies that are using AI and automation to shake up old ways, save their customers money, and drive efficiency.
Deere (DE -0.65%) has spent decades investing in these burgeoning trends. And in many ways, Deere stock is an AI play that's hiding in plain sight. At the CES conference in 2022, Deere wowed investors when it unveiled its autonomous tractor. But Deere's automation offering is so much more than that product alone.
Here's a look at some of the ways Deere is automating farm operations, and why the company is poised to lead technological adoption in the agriculture industry.
Image source: Deere.
An example of how Deere is leveraging AI and automation
During his talk at CES 2022, Deere Vice President of Automation and Autonomy Jorge Heraud discussed a few of the ways that Deere's tractors help farmers with the planting process. One way is by automating the path of the tractor so the farmer can plant straight rows. Another is by automating seed placement to maximize crop yield and the number of seeds that can be planted in a given acreage.
By putting cameras on sprayers, Deere helps farmers detect crops versus weeds. The sprayers then use just the right amount of product needed to support crop growth or get rid of weeds. Heraud said that this spraying technology saves farmers 80% on product costs, which improves farm sustainability.
Yet another feature is using cameras during harvest time to monitor crop conditions and then using AI to automatically adjust settings to improve harvesting efficiency. This planting example gives you an idea of Deere's big-picture strategy and the importance that AI and automation will have in making further improvements.
Blending brains and brawn
The initial purpose of tractors was to replace oxen and horses and make work easier. Much of the growth throughout Deere's rich history has centered around making tractors stronger and more versatile to replace physical tasks. But many of the improvements in today's tractors stem from data-driven insights that were previously unattainable. In this vein, today's tractors are integral in providing the brains and the brawn on a farm.
The value proposition for Deere is giving farmers the tools they need to do the most with the resource they have. This could mean saving money on fertilizer, maximizing production, avoiding unnecessary fuel expenses, and saving farmers precious time by automating mundane tasks.
Excellent results with multidecade potential
Part of what makes the Deere investment thesis compelling is that the company is producing record results while also sporting ultra-long-term potential to leverage AI and automation in the agriculture, construction, and forestry industries for decades to come.
Deere is on pace for a record fiscal 2023 following a record 2022 and a record 2021. The company's fiscal 2023 guidance of $9.25 billion to $9.5 billion in net income is staggering when you consider it's more than the company made in the three years from fiscal 2018 to fiscal 2020.
Deere stock is currently enjoying a declining price-to-earnings (P/E) ratio -- signaling that profit growth is outpacing the stock price's appreciation.
DE PE Ratio data by YCharts
Granted, Deere is a cyclical stock. So its P/E ratio tends to be low during growth periods and higher during downturns. Still, Deere's 12.5 P/E ratio indicates that profits could be cut in half and Deere would still sport a P/E ratio close to the S&P 500 average of 22.2.
Part of the reason Deere has a low P/E ratio is that it uses so much of its excess earnings to buy back stock. Like Apple, Deere has leveraged the two-pronged benefit of growing earnings and reducing its outstanding share count -- which permanently boosts earnings per share by decreasing the denominator of the equation.
Deere reduced its shares outstanding by 6.4% in the last three years and 23.4% in the last 10 years. Passive income-orientated investors may prefer to see excess earnings go toward paying more dividends. But it's actually better for long-term investors if a company buys back its stock instead of paying dividends if it proves it can get shareholders a better return on that capital over time. Given that Deere stock has outperformed the S&P 500 and the Nasdaq Composite over the last three, five, seven, and 10 years, it's safe to say that investors have been handsomely rewarded by its decision to invest in research and development and buy back stock.
A unique investment opportunity
Deere is one of the few legacy companies that blends present-day success with long-term upside. For example, there are plenty of oil and gas companies that booked record years in 2022. But those companies are undergoing an energy transition and will need to supplement profits from fossil fuels with cleaner alternatives in the future.
On the flip side, there are many unproven companies that promise paradigm-shifting technologies but lack the profits to fuel that growth with cash and must instead rely on capital markets for dry powder.
Deere has the unique advantage of being the industry leader in agriculture machinery. This was not only one of civilization's first industries, but it continues to be an industry civilization simply cannot live without. If you're interested in AI and automation but have a low to moderate risk tolerance, you may be more interested in companies like Deere that have a track record for organic growth and the long-term tailwinds that can drive decades of value creation instead of a riskier company whose AI prospects are feast or famine.
