Deere & Company: Long-Term Buy on Dips

Deere & Company (DE) just reported a decent quarter (see conference call transcript) and is now a buy on any dips simply due to its positioning in one of the hottest secular growth stories I've ever seen: agriculture.

Deere & Company makes tractors, farm equipment, integrated agricultural management systems, and irrigation equipment, just to name a few. When you think of agriculture and farming, Deere & Co is one of the first names that come to mind (and, rightfully so). Their bright green and yellow logo can be seen all over the United States and world. They have been dominating the agriculture industry for years and plan on doing so for the infinite future.

With the recent bull market in agriculture, it would be stupid not to include a name such as DE on your watch list. Sure, everyone is more interested in the seeds and fertilizers as the boom continues, but don't forget about DE in the process. As farmers lavish in high commodity prices such as wheat and corn, they now have more money to put back towards improving their farm. Sure, they will most likely buy seeds and fertilizers first, BUT, there's only so much of that they can buy. With limited farmland, they can't buy millions of seeds without the necessary amount of farmland to plant them all. So, naturally, they use the rest of the money to upgrade their equipment.

That's where DE comes in. They make so many different farming machines it would take a paragraph just to list them out. They have dominated that market share. Deere is one of the most trusted names out there when it comes to tractors and other various farming machines. With the recent agricultural boom, you can bet good money that DE has seen a ton of their products head off to farms across the USA. This is a long term buy simply because the food and famine issues are not going to go away anytime soon. Not to mention that the high crop and fertilizer prices just play into the whole story. There is high demand and limited supply of nearly everything. Until this gets corrected and producers can start producing enough to meet demand, DE and other ag names are a buy.

If you want to see a solid performing stock, just take a look at the 1 year chart of DE, revealing a beautiful uptrend. I said at the beginning of this analysis that DE is a buy on dips and this chart shows you exactly why. Look at every major dip on the DE chart. Literally every single dip has been a great buying opportunity, and the one we've just seen is no different. If you got into DE in January when the markets were abysmal down at 73, then kudos to you - that takes balls of steel. As Buffett says, buy when there's blood in the streets.

DE trends up in a practically perfect channel, following its 50 day and 200 day moving averages as supports. Right click here and open in new window - this is about as good as it gets for a long-term chart. DE is a solid company within a solid sector. Agriculture is going nowhere in the near future as farmland becomes scarcer and commodity prices continue to rise. This is simply a buy on dips in a long term name, simple as that.

Why is DE such a solid buy on dips name? Well its partially due to the fact that they are just a solid, well-run company. Turning to fundamentals, we get a better idea how financially stable DE is. With a trailing PE of 21 and a forward PE of 14, DE's valuation is good. A PEG ratio of 1.88 might indicate that DE is done growing, but that is far from the case. The recent run-up in agriculture stocks due to the ag-bull market is skewing these numbers. DE's machinery is selling like hotcakes. With operating margins of 11% and a return on equity of 24%, DE is a solid player in the agriculture game. Its margins could be better, but those should increase over time. DE also has a price to sales ratio of only 1.57, signaling supreme undervaluation (any PS ratio under 5 = undervalued). DE has a market cap of $34 billion and growing.

Overall, DE posts sounds numbers in a thriving sector. Growth is definitely one factor not as apparent in the numbers. This agricultural bull market will surely see DE's orders continue to surge, yet the PEG reflects a growth story that is stagnant. This just goes to show that sometimes the numbers are skewed and you have to look beyond the numbers and into the current market environment. This is exactly the case with DE. With quarterly revenue growth of 20% and quarterly earnings growth of 52%, DE would be pretty much trading at a discount to its earnings growth rate. This is just another reason to own this name on pullbacks.

Looking at the Institutional ownership aspect of DE, we see that it includes some big names. Major shareholders of DE include: Vanguard, Barclays, T. Rowe Price, BlackRock, and Chase.

Analyst coverage of DE reveals an astonishing consensus among some of the big investment banks and research firms. Citigroup, Cleveland Research Company, and Wachovia ALL rate DE 5 stars. Merrill Lynch is the laggard of the group, ranking DE a respectable 4 stars. Clearly the analysts are fans of DE's strong position in the agriculture sector. They all expect DE to significantly outperform the market with less than average risk over the next 6 months. And, given the secular bull market that agriculture is right now, you could argue that DE has less than average risk for the entire next year (based on all the estimates agriculture names have been giving).

So, its really quite simple. The secular growth story DE is in right now gives you reason enough to own it. But, as if that was not enough, you could also own it for strong fundamentals, or a very strong uptrending chart. Commodity prices have skied higher recently with agricultural commodities such as corn and wheat experiencing big run-ups. Farmers directly benefit from this as they receive higher prices for the crops they harvest. In turn, the farmers use this increased cash flow to plant and harvest more crops. Thus, the seed producers, the fertilizer producers, and the machinery producers all benefit. It is one giant domino effect. Deere is a direct beneficiary of higher commodity prices and an agricultural bull market. And, the best part is, this ag-bull market is not going anywhere. Farmland is scarce and farmers are growing as fast as they can to try and meet demand.

Agriculture is a sector that will see continued strength in the coming year and DE is one of the best names in the sector. Buy this name on dips simply because it works. Just look at the chart, it speaks volumes. Buy on dips and savor the ag secular growth story. --seeking alpha