Deere & Company (NYSE:DE) is a leading manufacturer of farming, construction and forestry equipment as well as some consumer goods like riding lawnmowers. It also has a financial services subsidiary, the "John Deere Capital Corporation" which enables the company to provide loans and leasing to its customers.
Deere shares were trading at about $94, which has been close to the top end of the recent range, but a recent pullback to roughly $86 has created a buying opportunity since this is at the low end of the recent trading range. (This is indicated on the chart by the light blue uptrend line.) Plus, the stock is trading near the 200-day moving average of $85.04, which is a key support level. This could mean that the stock has strong support around current levels. This, along with the fact that it is at the low end of the recent range, is why I consider this stock to be in the "buy zone".
Deere & Company recently reported second-quarter net income of $1.084 billion, or $2.76 per share. This compares favorably with net income of $1.056 billion, or $2.61 per share, for the same period last year. Revenues increased by about 9%, to $10.914 billion, which was a record. Strong demand for farm machinery and some new products led to these better than expected results. The company made positive comments on the quarterly results and for the rest of the year, it stated:
"After a record-setting second quarter, John Deere is well on its way to another year of strong performance," said Samuel R. Allen, chairman and chief executive officer. Second-quarter sales and income were the highest for any quarterly period in company history, he pointed out. "Deere's results are a reflection of positive conditions in the global farm economy, which continues to show impressive strength. The company's performance also offers further proof of the adept execution of our operating and marketing plans, which are aimed at expanding our global market presence."
There are a number of downside risks to consider. For example, another recession could reduce demand, and poor weather or natural disasters could impact crop planting. Another issue could be the Japanese Yen which has declined significantly in the past few months. This appears to be creating a significant competitive advantage in certain markets for Japanese companies like Kubota (KUB) which also makes farm equipment. Kubota shares have jumped from about $55 in February to around $80, which shows investors are expecting the decline in the Yen to significantly benefit that company. However, Deere seems to be managing these risks properly and so far, none of them have become insurmountable.
Earnings estimates are $8.53 for 2013, and $8.77 for 2014. This puts the price to earnings ratio at just around 10 times earnings. That appears cheap when compared to the average PE ratio of 16 times for the S&P 500 Index (NYSEARCA:SPY). It also looks undervalued next to Caterpillar (NYSE:CAT) which is expected to earn $6.87 in 2013, but also trades for around $86. Caterpillar shares trade for nearly 13 times earnings which is a 30% premium to the PE ratio for Deere. Another positive is that Deere pays an annual dividend of $2.04 per share, which yields 2.4%.
With the stock now at the low end of the recent trading range, strong financial results, a globally recognized brand, and a below market PE ratio, Deere shares appear to be giving investors a solid buying opportunity.
Here are some key points for DE:
Current share price: $86.29
The 52 week range is $69.51 to $95.60
Earnings estimates for 2013: $8.53 per share
Earnings estimates for 2014: $8.77 per share
Annual dividend: $2.04 per share which yields 2.4%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.