Sometimes branding is as simple as a color. You've probably driven by someone mowing their lawn or a farmer driving through a field and recognized Deere & Co.'s (DE -0.18%) famous shade of green.
The company is a staple in the farming industry, an often-overlooked multi-trillion-dollar greenfield of opportunity for long-term investors. The world's population is growing daily, and there is only so much land to grow food on.
That makes Deere an intriguing long-term investment idea. However, is the stock a buy today? I'll break down this opportunity to identify whether the stock is a buy, sell, or hold.
The global opportunity is massive
Feeding the world's population is a large and complex issue that most people in developed countries might take for granted. There are more than 8 billion people today, which could surpass 10 billion by 2050. According to a study by the World Resources Institute, sustainably feeding the world's projected 2050 population will come down to closing three gaps between what the world produces today and what's needed in the future:
- A 56% food gap in crops.
- A 593 million-hectare gap in agricultural land.
- 11-gigaton GHG mitigation emissions gap.
In other words, the world must make more food from less land, and do so more cleanly. That creates a significant opportunity for innovation and technology to help farmers yield crops from the land more efficiently and reduce emissions. The global farming industry is worth an estimated $13.4 trillion today, which could grow past $19 trillion by 2027.
Deere is a staple in solving these challenges
Known for its famous shade of green, Deere sells agriculture, construction, and forestry equipment and technology solutions worldwide. Its machines range from small tractors to massive machines that can quickly harvest crops in massive fields. The company also has a financing arm that provides loans to customers on purchases.
Farm machinery is generally a big-ticket purchase for farmers, which makes Deere & Co. a cyclical business that can see some downside when the farming industry suffers a downturn. However, you can see that sales and profits have grown impressively over time, which could continue due to the long-term need for agricultural investments discussed above.
DE Revenue (TTM) data by YCharts
Financially, Deere is rock-solid. The company's credit rating is comfortably in investment-grade territory with the major credit bureaus, and Deere carries about $6 billion in cash on its balance sheet, more than a year's worth of free cash flow. This should give investors peace of mind that management is well-equipped for the next industry downturn.
Is Deere a buy, sell, or hold?
The intersection between opportunity and capability has analysts feeling optimistic about Deere's future. Consensus estimates call for earnings-per-share (EPS) growth averaging 13% annually over the next three to five years. Considering 2023 EPS estimates of $31.85, the stock trades at a price-to-earnings ratio (P/E) of just under 13.
Remember that business could be volatile if a recession or something else pushes farmers to delay big purchases. Still, the double-digit growth outlook does underline confidence in the business. Assuming growth estimates are accurate, the stock's PEG ratio is just 1 today. In other words, investors are being offered a pretty attractive price for the stock given its expected growth.
Even assuming no valuation change, investors are looking at roughly 14% potential annual investment returns just from EPS growth and a dividend that yields just over 1% at today's prices. The stock's seemingly high floor for double-digit returns makes Deere & Co. an attractive buy for long-term investors.
