A Bumper Crop of Profits by Neil A. Martin
Highlighted companies: Deere & Company (DE), Caterpillar Inc. (CAT)
Summary: Deere & Company (DE) is the worlds largest farm-equipment manufacturer. The article takes an in-depth look at the company that is very bullish. Factors: 1) The high cost of oil drives ethanol demand, pushing up corn prices, and putting more money in farmer's pockets, which they typically use to buy new equipment to increase harvests and yields. 2) More than 30 new ethanol distilleries are under construction to augment the 101 already in operation which should create additional demand for corn, pushing ethanol-based demand from its current 25% to 50%. 3) CEO Robert W. Lane has overhauled manufacturing practices and trimmed costs since taking over in 2000. 4) Their "rock-solid" balance sheet and shareholder-friendly policies are a draw for investors. Key numbers: Forecast earnings: $6.05/share ($1.63b); the Street's current forecast for '07 is $6.87. ROE: 17.1% (up from 8.7% in '03). Cash: $2.30/share. Quarterly dividend: $0.39 (2%). Competition: Caterpillar Inc. (CAT) has outperformed Deere over the past two years, but this could change soon: Caterpillar's focus on heavy equipment makes it vulnerable to economic downturn, while Deere's corn-orientation gives it upside due to increased ethanol demand and the uptrend in corn prices. Barron's bottom line: "Near 80, Deere shares are off more than 11 points from May's high. The stock could hit $105 in a year and $134 in two, as rising corn prices put more cash in farmers' pockets."
Quick comment: Eugene Bukoveczky points out what some analysts seem to have missed: the same high fuel prices that are driving ethanol demand are also making holes in farmer's pockets; farm fuel costs have increased 50% since 2003 • Market Participant wonders: Ethanol Stocks: Investing or Speculating? • Jim Cramer's Sept. 12 Stop Trading! Stock Picks included Deere • In Barron's Q4 analyst roundtable a few weeks ago, they cited Deere's recent earnings warning as a hint conditions may be on the verge of deterioration • Debra Fiakas expresses doubts about the viability of ethanol as a replacement for existing fuels. • Cramer insists ethanol is finished, "even if oil jumps back up to $70." • Hawkeye Holdings (HWY), one of last week's eight scheduled IPOs, delayed the offering due to market conditions • Seeking Alpha's coverage of the ethanol sector.
DE vs. CAT vs. S&P 2-yr Daily Chart