Is now the best time to invest in a company like Deere and Company (DE)? This is a question that all investors looking at these types of companies must ask themselves. There are a few considerations as we look at what others think as well as our global economy.
Analysts are Mixed on the Company
Recently, Piper Jaffray & Co. upgraded Deere and Company from neutral to overweight and increased the price target on the company from $85.00 to $93.00. What were the reasons for this change? Looking at the overall market, analysts at Piper Jaffray believe the 2013 will be a better year than investors believe and one that Deere should benefit from. After all, the company has strong (near-term) fundamentals working in its favor right now. There are some headwinds the company does have to face such as: possible drought conditions, diminishing tax incentives for buying equipment, and high used inventory. But the combination of high prices as well as insurance should keep the money flowing equipment going out the door
With a differing viewpoint, JP Morgan reduced its rating on Deere & Co from Overweight to Underweight and lowered its price target from $98 to $78 in mid July. The reasoning? The drought in the Midwest will temporarily hamper sales. As yields are expected to decline, they expect weaker sales from August into next Spring, at the earliest, as farmers deal with low yields this year and the impact on sentiment into 2013."
Watching Two Similar Companies
It is interesting when we put two very similar companies side by side and attempt to understand where the global economy is taking us. Caterpillar (NYSE: CAT) had very good earnings this quarter but also declining value to its stock. It is a heavy equipment mover with construction projects all over the world that use its equipment. Deere on the other hand also makes larger machinery but has only declined a third of what Caterpillar has. The difference between the two is strictly the agricultural market that Deere sells in. So on one hand, Caterpillar appears to be a better buy than Deere but both companies are going to be profiting big time when the economy takes a turn upward. Either the recession is overblown and it will happen soon, or investors will just have to be patient and give companies like these two a couple years to turn around with the economy.
I don't think I would be too concerned about Caterpillar's microscopic revenue pullback. It is just a conservative move. As a company, it is well positioned for global growth and will take off when things start to look better. And I know a lot has been written about China's slowdown, but it really is not going to have any major impact on Caterpillar. It is only 5% of its entire sales and the company is planning to cut prices and export some of the excess equipment to get inventories in line there anyway.
Deere's geographical focus has helped it more than anything with two thirds of its sales taking place in the U.S. and Canada while Caterpillar gets (two-thirds) outside. But like CAT, Deere is well positioned for global growth when things pan out.
Looking at these companies together shows us that the stronger company is the one that has most of its revenue in the states because this is where the strongest economy is right now. So if we picked one to consider, I guess it would have to be Deere just for that reason.
If we observe Deere's charts:
(click to enlarge)
Technically Speaking
The company has had a modest bearish peak and valley pattern since February. We can see some indications of a possible reversal in this gradual role. The RSI indicator reveals a mild positive divergence taking place and this can signal a reverse in direction. The gradual downward trend could be leveling out. And if we look at the MACD, we can also see a steady building in upward momentum that supports the RSI. So Deere could be signaling a reverse in direction.
With the short-term view of the stock mixed by analysts because of the drought here in the U.S. one would have to choose if now is a perfect time to get into the stock. We have made the case that it is positioned well having most of its business here in the U.S. and is set up for international growth also once things turn around. The only question is: Will the economy turn around sooner than later? Invest now and be prepared to wait or invest now and expect a quick turn around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
