Deere & Company (DE, Financial) is a manufacturer and distributor of agriculture and turf, and construction and forestry equipment worldwide. This article looks at the reasons for considering this 2.7% dividend yield stock as an attractive investment option.
Attractive Valuations
Deere & Company is currently trading at a trailing twelve month PE of 9.9 and an EV/EBITDA valuation of 10.2. In comparison, Caterpillar (CAT, Financial) is trading at a trailing twelve month PE of 18.1 and an EV/EBITDA valuation of 11.1.
Even in terms of dividend yield, Deere & Company offers a marginally higher dividend yield of 2.7% as compared to 2.6% for Caterpillar. Therefore, Deere & Company looks very attractive on a relative basis and the valuation points to a potential stock upside from current levels.
Robust Growth in Emerging Markets
As GDP growth remains relatively muted in the developed markets, Deere & Company is focusing on developing markets to boost its growth. The company’s investment in emerging markets has yielded results with Africa, Asia and Middle-East sales growing at a CAGR of 17% in the period 2007-2013. Growth in Central and South America has been even robust with a CAGR of 18% in the period 2007-2013.
I believe that these two regions will be the key growth drivers for Deere & Company going forward as well. With strong investment in these regions, the share of revenue from developing markets will increase and this will keep the EPS growth momentum strong.
I must also mention here that Deere & Company has clocked decent revenue growth in US & Canada as well. During the period 2007-2013, revenue has growth in this region at a CAGR of 8%. The primary reason for good growth in US & Canada is the company’s focus on the agriculture and turf segment as compared to Caterpillar’s focus on the mining segment. Also, the recovery in the housing and construction market in the US has helped boost growth.
The key point however remains that Deere & Company has made a strong presence in relatively high growth markets and this should keep the company’s EPS growth robust.
Value Creation Through Share Repurchase
Deere & Company, as a part of its shareholder value creation strategy, has embarked on a continuous share repurchase program. Excluding YTD14, the company has purchased shares worth $5.2 billion in the last five years.
In addition to this, the company has also purchased shares worth $1.1 billion in YTD14. A strong share repurchase program ensures a continuous EPS boost for existing shareholders. I believe that share repurchase will continue with the company having a robust cash position of $4.6 billion as of April 2014.
According to the company’s CEO, Samuel Allen, the repurchase reflects the confidence in the company’s long-term future growth opportunities and also exemplifies the company’s commitment to creating superior long-term value for investors.
Conclusion
Deere & Company is a shareholder friendly company trading at very attractive valuations. Over the last five years, the company has made significant inroads in emerging markets with robust revenue growth while maintaining steady growth in the developed markets.
Besides the valuation and emerging market focus factor, Deere & Company has also been investing in R&D with the company’s investment being the highest in the industry as a percentage of sales. These investments should translate into new growth avenues for the company in the future. All these factors combine to make Deere & Company an attractive investment option to consider for the long-term.
