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Omar Venerio
Omar Venerio
Articles (833) 

Deere Expands Its Product Portfolio

The stock trades higher on the back of German acquisition

July 14, 2017 | About:

Last month, Deere & Co. (NYSE:DE) announced the acquisition of German road-building equipment manufacturer Wirtgen Group for more than $5 billion. The deal is expected to close in the first quarter of fiscal 2018.

The purchase involves cash and new debt of about $1 billion. But looking at the financial structure of the company, it does not appear to be a problem. This combination will provide Deere with a portfolio of top products as more than two-thirds of Wirtgen's sales come from products that are number one or two in their markets. This strategic move should provide a lot of value in the future as the stock hit an all-time high after the announcement in June.

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Moreover, since the two companies complement each other, the deal is expected to generate around $110 million in synergies over the next five years.

The company also wants to expand into international markets, including Brazil, Russia, India and China.

Deere posted EPS of $2.49 for the second quarter on May 19, beating estimates by 81 cents. Revenue of $7.26 billion fell short by $50 million despite a 2.1% increase year over year.

According to Yahoo Finance, the estimated one-year target share price is $131.83. If an investor buys shares at the current market price of $125.47, the return from price appreciation would be 5.1%. In addition, an investor should consider any cash flow received by the asset. So for holding the stock one year, the shareholder would be paid a dividend of $2.4 at the end of the year. When dividing this number by the current share price, we obtain a dividend yield of 1.9%. So the total expected return for investing in Deere is 7%, which we think is attractive.

Final comment

Deere is a stock to include in a diversified portfolio. Looking forward, as the global population grows and requires more agricultural productivity, the demand for the company's products will grow.

Ken Fisher (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) initiated new positions in the stock in the first quarter of 2017. Joel Greenblatt (Trades, Portfolio) and Andreas Halvorsen (Trades, Portfolio) upped their stakes by 58.4% and 55.3%.

Disclosure: The author holds no positions in any stock mentioned.

About the author:

Omar Venerio
Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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