Buffett Has Plenty of Company, Among Fund Managers, in Buying Deere: Here’s Why

We all know Warren Buffett’s fondness for farm analogies and the heartland, so perhaps it’s no surprise that his Berkshire Hathaway (BRK.B) team picked up a stake in tractor maker Deere & Co. (DE) last quarter. But Buffett’s not the only smart guy buying Deere lately.

John Rafal of Essex Financial Services, an independent famous for good individual stock picks, likes Deere’s combination of income (there’s a 2.2% dividend yield now) and growth. So does Neel Kashkari, managing director of fund giant Pimco. Thomas Russo of Gardner Russo & Gardner has been adding Deere to his hedge fund all year.

Perhaps the bigger surprise here is that Deere shares are now more popular with value investors than those of its arch rival Caterpillar (CAT). Caterpillar is the world’s biggest maker of construction and farm equipment, which happen to be Deere’s core businesses too. Caterpillar’s annual revenues are near double Deere’s, and its market cap of $53.52 billion market cap compares to Deere’s $33.91 billion.

With that background, Cateripillar shares historically have been the star performer to Deere’s mediocrity. But the past six months, the trend has been reversing. Deere shares are up 13%; to Caterpillar’s are down 11%, as seen in a stock chart.

DE Chart

DE data by YCharts

So what’s the difference? Both companies did very well in 2011, when high crop prices fueled a lot of farm equipment buying. Sales at both companies were hurt when this year’s drought crimped farm bank accounts. But investors are probably looking more at differences in their sources of growth recently. Caterpillar’s growth of late has come from selling mining equipment, often overseas. Deere’s biggest growth comes from domestic construction and forestry equipment sales.

Industry analysts are not optimistic about mining at the moment. Coal remains a tainted product in North America, where the re-election of a Democratic administration canned any hope that environmental restrictions would be eased. China is one of the biggest consumers of coal, but slowing economic growth there also means that sales there won’t push up Cat’s overall revenues as hard as it has in the past.

Deere, on the other hand, still collects about three-quarters of its revenues in North America, where analysts see economic recovery on the horizon. Its forays into emerging markets in India and Brazil look safer than Caterpillar’s hold on China these days.

ISM Manufacturing Production Index Chart

ISM Manufacturing Production Index data by YCharts

Deere’s PE ratio is at about 11 now, which is very low for the stock even if Caterpillar is cheaper at a PE ratio of about 8. Deere has a rising dividend that earnings more than adequately cover.

DE Dividend Chart

DE Dividend data by YCharts

Short-term, high crop prices are expected to help Deere, as they fuel a high level of farm activity. Some of those crop insurance checks covering drought losses will surely go to equipment purchases. Long-term, the world’s demand for food continues to skyrocket, and the world’s equipment for cultivating it is in desperate need of upgrade. It doesn’t take a lot of smarts to realize there’s a future in tractor sales.

Dee Gill is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.



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