On Aug. 21, Deere & Company (DE, Financial) announced third-quarter results, which were disappointing, and the stock has been trending lower on a gloomy outlook for the near term. From a high of $97.1 on Aug. 10, the stock has not corrected by 24% to current levels of $73.8. In my opinion, this deep correction is a good accumulation opportunity. I would like to stress here that I would advise gradual accumulation instead of a big plunge in the stock as global economic uncertainty can remain prolonged.
The first point that I want to mention is that there is no doubt that market fundamentals remain weak for the agriculture and construction segment in the near term. However, for the long term, the agriculture sector will be a major growth driver for Deere & Company. With Deere & Company having increasing presence in Asia, Africa, Middle-East, Latin America and Australia, these high growth markets will deliver strong growth and cash flows in the next three to five years. The correction is an opportunity to accumulate the stock that will trend higher in the long term (primarily driven by agriculture segment growth).
Even in these challenging times, Deere & Company has been working on creating a good operating base for the long term. On Nov. 2, the company announced an agreement to acquire Monosem, the European market leader in precision planters. This will help Deere & Company gain a stronghold in the precision planting market.
In addition to inorganic growth, Deere & Company has an innovation team to launch new products that deliver value and enhanced agriculture performance. For Deere & Company, the research and development as percentage of sales is over 5% as of FY14, and this underscores the company’s focus on innovation-driven growth. There is no doubt that global food demand will continue to rise, and farming productivity needs to improve accordingly. Deere & Company is well placed from this perspective with innovation being a key growth driver for the company.
The following statement from the company puts things into perspective:
"We believe our steady investment in new products and geographies will make Deere the provider of choice for a growing global customer base and that the impact of these actions will become increasingly clear when our end markets recover."
Besides the long-term perspective, it is also important to mention here that Deere & Company has been increasing dividends on a consistent basis and currently pays an annual dividend of $2.4 per share. While dividends might not increase in FY16, even the current dividend payout makes Deere & Company an attractive dividend stock. Deere & Company has also continued to repurchase shares, and the company has already invested $1.8 billion in share repurchase in YTD15. This provides an additional EPS boost, but I don’t see decline in share repurchase as a worry in order to conserve resources for growth.
Deere & Company has been innovator and shareholder value creator in the past. The industry challenges have resulted in steep correction in the stock, but the company continues to work toward innovative solutions that will translate into strong growth upside when industry conditions recover. Amid challenges, there are opportunities and Deere & Company is making most out of the challenges in the agriculture industry. The stock is a buy for the long term.
Disclosure: No positions in the stock
