Building wealth in the stock market is as simple as investing in quality companies and allowing your investment to grow over time. One blue chip stock that delivered for investors for years is Deere (DE -0.18%).
Deere established itself as a top provider of agricultural equipment with a strong brand and a loyal customer base, and it has delivered excellent returns for investors. If you purchased $3,000 in stock in Deere 10 years ago, your investment would be worth $18,170 today. To put this in perspective, a similar investment in the SPDR S&P 500 ETF would be worth $9,704 today.
Here's why Deere stock crushed the broader market and is poised to keep delivering for its investors.
DE Total Return Level data by YCharts
Deere is one of the largest providers of equipment across crucial supply chains
Deere is a major player in developing and manufacturing machinery for agriculture, forestry, and construction. In 2022, it generated $53 billion in sales across its four primary segments:
- Production and precision agriculture, its most significant revenue-producing segment, raked in $22 billion. This segment includes equipment and technology solutions for growers of grains, cotton, and sugarcane.
- Small agriculture and turf operations produced $13.4 billion in revenue. In this segment, it sells equipment for livestock producers, including tractors for gathering hay, and commercial lawn equipment, like those used to maintain golf courses.
- Construction and forestry operations generated $12.5 billion in revenue. This is where the company accounts for heavy machinery like bulldozers, excavators, milling machines, and log harvesters.
- Financial services brought in another $4 billion in revenue, and this is where it accounts for financing and leasing its equipment.
What makes Deere a solid investment is its position as a leading supplier across multiple segments, supporting agriculture growth and construction across the supply chain. Over the last decade, Deere's diluted earnings per share (EPS) has grown at 13% compounded annually. Its free cash flow per share, which is how much cash it has left over after paying for operational costs and capital assets, has grown at 19% compounded annually.
Earnings could fluctuate with the economy, but Deere's long-term growth story is solid
Deere's business is cyclical, meaning it benefits when farmers' incomes rise, which they have in recent years due to elevated crop prices. As a result, its earnings tend to ebb and flow, depending on the performance of the broader economy.
As long-term investors, you want to understand the risks of investing in cyclical stocks. However, over more extended periods, Deere has delivered for investors. One way it continues to deliver is by innovating in the agricultural space.
In 2020, Deere began implementing something it calls the "Smart Industrial operating model." Through this initiative, Deere is focused on developing intelligent, connected machinery and equipment to transform agriculture and construction. The goal is to boost crop output and make farmers even more efficient while reducing waste and becoming more sustainable.
Deere rolled out numerous exciting features for farmers. For example, its automated tractors can maximize the yield and number of seeds planted in a given space by optimizing the tractor's path and the precise placement of seeds. Another feature is using cameras to monitor crop conditions and sprayers to apply the right amount of product to grow crops or eliminate yield-reducing weeds. These practices could save farmers up to 80% on product costs, according to Jorge Heraud, Deere's vice president of Automation and Autonomy.
Image source: Getty Images.
Is Deere stock a buy?
Deere stock trades at a price-to-earnings (P/E) ratio of 13.6, making the stock look relatively inexpensive. However, keep in mind that cyclical stocks tend to trade at cheap valuations at the top of their cycle, so it may not be a bargain necessarily.
That said, this blue chip company remains a top machinery and equipment provider, and its initiatives to continue innovating in the space make it an excellent stock for patient investors to buy and hold for the long haul.
