By virtually any standard, 2013 has been a surprisingly strong year for the U.S. equities markets. Now, however, there are economic shadows on the horizon, making it difficult for serious investors to locate sectors and individual companies with more upside potential than downside risk for 2014.
With energy commodities stronger than we might have expected, especially given the possibility of a deal with Iran, it's difficult for me to toss many traditional energy names into the has-been bin. But as billionaire investor Jim Rogers -- who doubles as the author of several well-written books, including the enjoyable Investment Biker -- noted to a national television audience recently, agriculture is a sector that has yet to rebound.
In the throes of change
I've recently told Fools that I believe DuPont (DD +0.00%) warrants special attention as it continues its metamorphosis from essentially a commodity chemicals company to one with a decided concentration on agriculture and food-related products. Another corporate icon that's been consigned -- too soon, I believe -- to the valuation dumpster is farm equipment manufacturer nonpareil Deere & Company (DE 1.17%).
In Deere's most recent quarter -- the final period of its 2013 fiscal year -- the company's per-share earnings topped the comparable year-ago period by 20% and throttled analysts' expectations by 11%. And despite its volumes slide in farm machinery and tractor sales, which together comprise 82% of its equipment complement, it's noteworthy that higher prices led to expanded profits from agriculture and turf equipment sales.
Obviously the company is being affected by price slides in several farm commodities, most notably corn, which today fetches about 40% less than a year ago. A reversal of that trend is hardly likely in the near term. And beyond that the company is projecting that other crops, including soybeans and wheat, will carry lower price tags in the year ahead. It's important to keep in mind, however, that current prices for most agriculture products have only recently come off the record levels that they'd achieved during the past couple of years.
The temporary slide
Longer term, looking at the period that began in 2005 and will conclude in 2050, global demand for agricultural products is expected to expand by a relatively steady 1.1% annually. Specifically, cereal production is anticipated to increase by 940 million tons to 3 billion tons, while the output of meat will likely expand by 196 million tons to about 455 million tons.
Technological advances, rather than greater land usage, will almost certainly be the key to the impending growth in agricultural output. For instance, Deere and the DuPont Pioneer seed unit have teamed up in a joint venture that will provide farmers with reams of data aimed at boosting crop production. Farmers will combine that scientifically arrived-at data with Deere's wireless transfer system to obtain specific, data-derived information on optimum planting times, harvesting choices, and field management.
None of this is to imply that Deere is the only agricultural equipment game in town. In 2012, Mahindra & Mahindra overtook Illinois-headquartered Deere as the world's numero uno maker of tractors. The Mumbai-based Mahindra also produces several types of automobiles, buses, and utility vehicles.
Then there's Japan's Kubota Corporation, a maker of farm machinery along with a host of other industrial and consumer products. CNH Industrial (CNHI 0.78%), a British company, manufactures and sells agricultural and construction equipment, along with trucks and other commercial vehicles. And finally, Deere overlaps with Caterpillar (CAT +0.32%) in several areas, particularly those that are construction-related.
Hammering the competition -- except at valuation time
But for U.S. investors, there's something special about Deere's readily recognizable equipment. And for those who examine them, many of the company's key metrics seem to lay waste to its rock-bottom valuations. For instance, Deere's trailing price-earnings ratio sits at about 9 times, compared with 16 times for Caterpillar and 13.5 times for CNH. That discrepancy exists despite Deere's operating margin of 14.5%, compared to 9% for Caterpillar and just over 7% for CNH.
Looking further, Deere's return on equity is a heady 41%, versus Caterpillar's 19% and CNH's rate approaching 16%. As far as return on assets is concerned, Deere tops Caterpillar and CNH by about 65% and 95%, respectively. As to forward yield, while its 2.40% is slightly below Caterpillar's 2.90%, Deere's rate compares to a goose egg for CNH.
Hard to lose with Deere in the coming year
I obviously can't predict with certainty when Deere will attain a valuation commensurate with its performance. But given the company's financial and operating strength, along with its strong ties to the vital agriculture sector, it seems wise to stow at least a modicum of its shares in Foolish portfolios for 2014.
