Analysis: John Deere (DE)

Notes:

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

John Deere is an industrial company most notably known for its farm machinery, but is also a major player in the construction and forestry equipment areas.  It's an international company selling in North America, South America, Europe and Asia, however, the largest chunk of income is derived from North America.  Most people probably think that Deere makes most of it's money from selling equipment, but the truth is, that's it's second largest source of income.  Equipment maintenance is actually it's most lucrative piece.  It also has a finance segment that can also be overlooked, but shouldn't be, considering the fact that it tends to have loan loss rates that banks can only dream of.

Past Year:
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.

2014 Prognostication:
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.