Why Deere Stock Is a Great Buy for a Wealthy Retirement (NYSE:DE)

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Speculative stocks can be fun while the music is playing, but you don’t want to be left standing when the music stops. This has been the case with many SPAC positions which are now down more than 50% since their all-time highs.

That is why it is worth investing in “great American” companies that have been around for a long time, and most importantly, that they bring real profits. In the words of Jeremy Siegel, it’s a classic case of “tried and true versus bold and new.”

This brings me to Deere & Co. (DE), which fits the mold of a great American company. In this article, I’m highlighting what makes DE an attractive purchase right now, so let’s get started.

Why Deere is a great buy for a rich retirement

Deere & Co. is the world’s largest manufacturer of farm tractors and combine harvesters, and a leading producer of construction equipment. It is divided into four business segments, produce growing, small-scale and turf farming, construction and forestry, and John Deere Capital, its retail and wholesale financing arm for clients and merchants.

Deere benefits from the advantages of scale and an extensive distribution network, with 1,900 dealer locations in North America and 3,700 locations globally. Deere has also been around for more than a century, and during this time, it has built a solid reputation as a pre-eminent manufacturer of a comprehensive and significant range of agricultural brands, making it one of the most important brands in the world.

Morningstar highlights the value of Deere’s innovation and end-to-end solutions, as shown below:

The company’s strategy focuses on providing a comprehensive solution to farmers. Deere’s innovative products target every stage of the growing process, which includes field preparation, planting and sowing, application of chemicals, and harvesting. The company also embeds technology into its products, from routing systems to seed placement, spacing, and custom spray applications. Deere is committed to expanding customer offerings and providing value-added services.

This has enabled Deere to charge premium prices for its products, backed by its quality, reputation and proven track record of customer service. This is reflected in DE’s A+ profitability score. As shown below, DE’s EBITDA margin of 21% is well above the sector average of 13%, and generates a net income margin of 13.6%, more than double the sector average of 6.4%.

DE . Shares Earning Score

monastery profitability

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Deere shows strong business performance, with net sales up 19% year-over-year during the fourth quarter (ending October 2021). This was driven by strong demand for Deere equipment, and DE also performed well internationally, with sales outside the US growing 16% year over year.

The current “extra cycle” of demand for agricultural and construction equipment has performed well for margins. As shown below, DE’s operating margin improved from ~11% in 2019 to 17.2% over the subsequent 12 months, and CFRA expects DE equipment operating margin to improve to 17.7% in fiscal 2022.

Derry operating margin

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Looking ahead, Deere should benefit from continued strong demand for farm and construction equipment as a result of positive economic fundamentals, crop prices, and infrastructure spending. This is supported by management noting the strong rise in digital usage and the area of ​​farmland involved in Europe during their recent conference call:

Newer product offerings such as ExactRate Planners and the compact X9 have seen significant increases over last year, while automation and software activation rates are above 85% for our Series 8 and 9R tractors. Additionally, we saw significant increases in customer interaction with our digital tools in 2021.

Participating acres are now over 315 million acres, due in part to a sharp increase in Europe, where the number of participating acres has doubled over the past year. Likewise, usage of our digital features like Expert Alerts and Service Advisor Remote has increased by about 30% compared to last year.

Meanwhile, DE has a strong A-rated balance sheet with $7.4 billion in cash on hand and a net debt-to-earnings before interest, tax, depreciation and amortization ratio of 4.6x, remaining well below 8.1x from fiscal year 2019. While the dividend yield is Earnings 1.15% is low, it comes with a safe payments ratio of 19%, and a 5-year compound annual growth rate of 10%.

Notably, DE should be considered as a total return story, as management has been somewhat aggressive in share buybacks. As shown below, the DE stake has been reduced by 25% over the past decade.

DE shares outstanding

DE shares outstanding

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Deere’s risks include supply chain disruptions and constraints that may affect the company’s ability to meet demand. In addition, China could pull back on agricultural imports, weakening global demand for crops, thus putting pressure on Deere customers. Finally, increased competition from the likes of Toro (TTC) could put pressure on margins and sales growth.

Having said that, I see value in Deere’s business model. Investment firm Baird recently expressed optimism about DE as the analyst sees improvement in agricultural fundamentals and sees momentum around Deere’s innovations in agricultural technology, including its introduction of a fully self-driving tractor at CES. Baird raised its target price for Deere’s stock from $425 to $475.

As such, Deere appears to be reasonably rated for growth at the current price of $364 with a PE forward of 16.4. This takes into account the 47.5% EPS growth that analysts expect for fiscal year 2022. Alpha’s Quant research has a buy rating and the sell-side analysts have an agreed price target of $412, implying a total return of 14% including dividends.

Deere stock analyst rating and price targets

DE . stock valuation

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Deere & Co. owns. A moat worthy business and represents a large American company with its strong brand and reputation as a leading manufacturer of agricultural and construction machinery. Its business is seeing strong fundamentals in the current recycling cycle with increasing global demand. Looking to the future, it should be able to maintain its momentum with digital offerings as it seeks to develop its product line. I see value in DE at the current price for potentially strong returns over the long term.

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