Analysis: John Deere (DE)
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash
2013 was a company version of a tale of 2 cities. On the company performance side, Deere made earnings and revenues like it never has in its storied past. It's margins have been expanding and really every time you hear a quarterly report, you were hard-pressed to find anything they did wrong during the previous quarter. However, this company's current management team has a tragic habit of being so cautious that they don't seem to show much in terms of joy or enthusiasm for what is in front of them - little for great opportunity, but a lot of reasons to be cautious. Because of this, the stock suffered a roller coaster ride of a year. It did near it's all time high in stock price during the year as it approached $95, however, even at that price, the company was only trading at about 11 times 2013 earnings estimates. That's a significant value compared to the industry and peer averages combined with the performance the company had. It also doesn't help that their stock is commonly paired with Caterpillar, which had a very difficult year and put a lot of pressure on the Machinery industry as a whole. The Industrial sector was a strong performer, but the machinery industry was weak. John Deere's stock ended the year up 5.68%, but compared to the S&P 500's 29.69% and the Industrial Sector's 40.41% performance (defined by the XLI ETF fund) a 5% gain is a huge fail. It should be noted, though, that the stock did make nearly a 10% move higher in the last quarter alone.
I actually expect JD to put forth continued strong numbers in the coming quarters despite their downbeat guidance. There are a few tougher compares coming, but despite the conservatism, this management team has been able to continue to generate more sales and revenues and have beaten analyst estimates 3 out of the last 4 quarters (one was a meet). All this with the fact that grain prices - particularly corn - took a pretty good hit last year. I actually believe grain prices are now stabilized and considering how wide the performance gap has been between commodities and equities (stocks) lately, that grain prices have a chance to rise. I do note that to be a cautious optimism at this point, though since the North American crop is a few months from even being planted. From a stock perspective, the company is still trading at about 10 times earnings with it's $90 price tag. Deere's peers and the industry averages are much higher than that (around 14-20x earnings). When this is taken into consideration along with signs that the economy is picking up, John Deere continues to be priced at a huge value and shows a lot of room to run. All that being said, DE also appears to be range bound from a technical perspective and we're near the highs. Additional factors to consider are the fact that DE has been consistently raising its dividends and I have a feeling we'll see another five cent raise in the near future. They've also been buying back tons of stock - over 18 million shares last year and almost 60 million shares in the last 3. Due to current uncertainties, my 2014 price target is $100. It's hard to get too upbeat when the management team can't, but at the same time, there's just too much value here to sell anything more than a small position to trade with and try to increase overall gains.
My Stock Ownership Plans:
I'm carefully watching this stock right now. I want to see it stay above $90 if/as the market takes some profits and I want to see it get past $95 to show the market's faith in the stock. If either of these fail, the stock could fall back as low as $82 as we stay range bound. Flip side is that if we hold and break through, I can see this stock pushing towards $120 over the next couple years as the stock begins to price itself more in line with its peers. This leave a $8 downside and $30 upside potential and is a reason why I continue to hold it. I may trade some of the shares with movements of the market - especially if the stock looks to be range bound or I see a market correction, but this stock still shows signs of huge profit potential, provides an adequate dividend. As of today's writing, this stock is 12.3% of my portfolio, so I don't have much room to buy more. I actually consider this stock a 1 and if I had need or room, I would buy more - especially if we go below $90.