John Deere (NYSE:DE)
trading at $58.70 as of 10/26/04
Remember when you went trick-or-treating as a kid? You would race up and down the street filling your pillowcases with candy bars. Every once and awhile you would knock on the door of a do-gooder who would gleefully offer up an apple instead of the usual Hersheybars or Reese's cups. Well, this year, I am that do-gooder. While my fellow Fools are offering up sugary stock picks like former Foolish trick or treats Yahoo! (NASDAQ:YHOO), Marvel (NYSE:MVL), Krispy Kreme (NYSE:KKD), and JetBlue Airways (NASDAQ:JBLU), I am recommending John Deere, the investment equivalent of an apple.
Don't despair. John Deere is just the thing your portfolio will need after the sugar rush of the other picks wears off in a couple of weeks. This Halloween treat is a relatively low-risk value play that should provide very respectable returns over the next five years.
John Deere is the world's leading manufacturer of agricultural equipment. The company also produces equipment for the forestry and construction industries as well as a wide variety of small tractors, lawn mowers, and utility vehicles for the consumer market. Agricultural sales account for almost 50% of all revenues, while the construction and forestry segment accounts for 20%.
The news out of Moline, Ill., the company's corporate headquarters, has been very positive of late. In the most recent quarter, earnings were up a white-hot 55%, while revenue increased 23%. In 2003, earnings increased by 100%, while revenues improved by 12%. Revenues are growing even faster in 2004 and are expected to be up by 32% for the year. According to a Wall Transcript report, John Deere, along with competitors Caterpillar (NYSE:CAT) and Eaton (NYSE:ETN), is benefiting from the first year of a three-year rise in the equipment manufacturing industry.
With all of this upbeat news surrounding one of America's most recognizable brands, you might expect its share price to be pretty steep and its valuation ratios to be somewhat bloated. But fortunately for you, this is not the case.
John Deere is currently trading at $58, which is 30% off its 52-week high. Its trailing P/E ratio of 13 is well off its historical average (and considerably lower than the industry P/E of 22). Analysts expect John Deere to grow its earnings by 10% per year over the next five years. Using projected earnings of $1.3 billion in 2004, my calculations yield an expected price of $118 per share in 2009. This would amount to a 14.91% annual return, which, combined with a 1.8% annual dividend yield, represents a very solid return for a blue-chip stock that will provide some ballast to your portfolio.
John Deere Financial Snapshot
| FY 02 | FY 03 | TTM | |
|---|---|---|---|
| Total Revenue | $13,947 | $15,534 | $18,664 |
| Earnings per share | 1.34 | 2.68 | 4.41 |
| P/E ratio | 32.50 | 21.30 | 13.47 |
| Price to Book ratio | 3.50 | 3.83 | 3.37 |
| Div. yield | 1.8 | 1.8 | 1.8 |
| Total debt | $13,387 | $14,751 | $14,246 |
| Total Cash & investments | $3,004 | $4,617 | $3,588 |
| ROE | 8.9 | 17.9 | 25.88 |
| ROA | 1.37 | 2.57 | 4.25 |
This all sounds very rosy. What's the downside? There are two macroeconomic factors that appear to be suppressing the upward movement of John Deere's share price. The first one relates to increasing costs of steel, which may have an impact on margins in the near future. But the company seems to feel that ongoing cost management will offset increases in raw materials prices, and recent earnings seem to support this view.
The other risk relates to predictions of strong harvests over the next few years, which will deflate crop prices and thereby lower demand for agricultural equipment. I must admit that I am somewhat skeptical of the experts' ability to predict harvests over the long term and wonder whether this factor might be exaggerated.
Despite these economic concerns, John Deere merits strong consideration from value investors. This is a rock-solid company with growing sales and earnings and relatively low volatility. Have you been consuming too many small caps and growth stocks lately? Treat yourself to an apple. Your portfolio will thank me in the morning. For additional value picks, check out Motley Fool Inside Value.
More Motley Fool Tricks and Treats:
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- John Deere: A Foolish Treat
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John Reeves doesn't own shares of any company mentioned in this article..
The Motley Ghoul's Tricks or Treats represent the opinions of each Fool only and should in no way be taken as the opinion of either The Motley Fool, Inc. or any company in question, or as representative of anyone or anything other than that specific Fool's thoughts. So do your homework, and review The Motley Fool's disclosure policy.
