As I was scrolling through the market, scouring for deals for my April buys, I came across a video on CNBC, where Sam Allen, CEO of Deere & Co. (NYSE:DE), discusses the state of the economy and where it stands in his mind. He states that overall the economy is improving, but that it is segregated into the two main groups: industrial, which is not improving, and the consumer base, which is doing very well. He also believes that although this is the case, the market as a whole may not be on a very solid footing, and therefore, it wouldn't take very much to knock it off its feet.
The video goes on to review where Deere & Co. stands as it is now. Recently, the stock has seen a bit of a slump. It has dropped from its over $100 price tag to a mere fraction of the price. DE is now only trading for $76.52/share as I write this article. I quote this because I want to stress how large the drop has been for this particular company. This is all, of course, happening while competitor Caterpillar Inc. (NYSE:CAT) is seeing the opposite trend. What, then, do we have to say for the company as it stands now?
Deere & Co. currently boasts a P/E of 13.93 and an EPS of 5.49, which would hint that the company still brings a lot of value to any investor. Generally speaking, I like to make sure the stocks I invest in are between a 10-20 P/E ratio, because this would seem to support that the stock is still favored, but at a place where it could go higher in value. This, coupled with the fact that it is yielding $2.40/share in dividend payments annually makes the stock even more attractive, because a dividend investor can see it as a healthy source of income. This becomes even more important for investors when a bubble seeming to be growing in the market. If, or when, that apparent bubble bursts, it will be that much more important to have a strong base of dividend payments flowing in, because it can buffer loses that will almost certainly hit your portfolio. If we move to Deere's past, we see another healthy trend that supports that the company has what it takes to move forward from a slump. Over the past five years, it has gained 5.82% in EPS, 1.8% in revenue, and a hefty 15.65% in dividends annually. In addition, Deere & Co. has seen an increase in cash flow since 2011, which has almost doubled since then. Those are incredibly healthy numbers that I believe support that the company knows how to manage its money and is positioning itself with cash reserves to buffer any pitfalls that it might have to weather in the near future if something does happen to the market.
The numbers also clearly point towards a well-managed portfolio of cash and an ability to be able to make money on what the company already has. These metrics are important to investors now even more than before, because we appear to be moving into a bear market since the start of the month of April. Whether this trend will continue and whether prices will continue to drop is yet to be seen, but it's important to have you money stock piled into solid dividend-paying companies when that happens, in order to ensure at least some payments are feeding in while the unrealized losses are so high. This not only helps your portfolio to stay somewhat normalized, but also helps you mentally as you weather the changes, because you'll be able to feel good about the payments moving in while you wait it out.
What then of the company's future prospects as regards continue growing the business? Deere & Co. has an answer to that as well. Recently, it decided to enter into the growing market of high-clearance spraying equipment. This came through acquiring a majority stake in Hagie Manufacturing. If you're not aware, this market is well up and coming because of the demand for late-season fertilizers and pesticides that would otherwise take too much time to put down. As a result of this acquisition, Hagie also leaps forward even further, because it gains access to Deere & Co.'s global distribution channel. This is important to the investor who may be eyeing DE, because it shows that it is placing its funds into acquiring other companies that are in commodities. The high-clearance spraying equipment company, Hagie, is essential to the future of DE. It supports the growth of food, which is an essential commodity for continuation of life. Unlike a company that makes hand bags, a company that supports crops that ultimately turn into food has a base that, as we stand now, cannot be written out of our lives no matter how good we're feeling or how much extra cash we have lying around in our bank accounts to splurge.
Although DE has recently seen a drop in price, due to what I can only guess would be its lackluster first-quarter 2016 earnings, the company has already started to take action to mitigate the blow. When the demand for farming equipment is weak, manufacturers have to take other routes to ensure profits. This, unfortunately, can come at a cost, such as having to lay off employees. However, with death can come a rebirth. Deere & Co. stands to benefit from the labor cut. Money can be put aside to keep the company running until there is a greater demand in future for food and for equipment that will ultimately need to be serviced or replaced. Couple this with the fact that Deere ranked 38th of 500 companies that were researched by Forbes magazine as one of the best employers to work for, and you've got a recipe for success. This would suggest that when manufacturing has to return to its full pace in the future, there should be more than enough manpower willing to work for the company by happily returning to it.
Moving forward, Deere & Co. will have some hurdles to overcome. First off, it needs to make a comeback once more over its main competitor. The company currently has a lower market cap ($24.05B) compared to Caterpillar ($44.03B), and it is also trading at a much higher EPS (DE's 5.49 to CAT's 3.50). Although these numbers would seem to support that CAT would be where investors would want to place their bets, I would point towards the future. Where Deere is buying up companies such as Hagie that are already using more futuristic equipment to aid in crops to weather hard times ahead, Caterpillar faces its own restructuring as demand for construction equipment slows. This would suggest that Caterpillar may be facing hard times in the very near future, while Deere is already moving forward, grabbing companies that will better serve to continue to bring in profits while demand for construction equipment falls. This would also seem to suggest that Deere & Co. may be opening itself up for further acquisitions as it moves forward, in order to make sure that it stays relevant. Only time will tell, but I think it's clear that a large group of dividend growth investors, myself included, will be looking forward to the next quarter's financial results to see how the new acquisition pans out.
With all of this said, is Deere & Co. really worth the investment? I would argue that it is. Even though it may face hard times currently, the company appears to be very well run, with a great mix of products for whatever the economy wants to throw at it next. Deere has positive earnings, can make the hard calls to lay off employees when it has to be done, and the company offers a substantial dividend for those who wish to still gain some profits as hard times hit the stock.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DE over 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.