We’ve all noticed that Warren Buffett is very fond of making farm analogies, as well as analogies about the heartland, so it really doesn’t come as a major surprise that Berkshire Hathaway took up a stake in the tractor maker Deere and Co. last quarter.
John Rafal of Essex Financial Services, who’s famous for making great individual stock picks, likes the combination of Deere’s income (with the now 2.2% dividend yield) as well as growth. The managing director of PIMCO, Neel Kashkari, is also fond of the company. Thomas Russo, of Gardner Russo & Gardner fame, has been adding onto his hedge fund’s stake in Deere throughout the entire year.
More surprising than anything else, the shares in Deere seem to be more popular with value investors then shares in Caterpillar, the archrival of Deere & Co. Caterpillar is currently the biggest maker of farm and construction equipment throughout the world, and that also happens to be the core business model of Deere too. Caterpillar has a market cap of $53.52 billion compared to Deere’s $33.91 billion. Cat’s annual revenue is nearly double that of Deere’s revenue.
Because of that impressive background, Caterpillar is usually the star performer of this category, while Deere is often relegated to mediocrity. But over the past six months, this trend is starting to finally reverse. Shares in Deere stock are up roughly 13%, while Caterpillar stock is down about 11%.
What’s the difference in price direction? Both of these companies did quite well during 2011. Since there were high crop prices, this fueled plenty of equipment buying in the farming industry. But on the flip side, both companies experienced a loss of sales because the drought this year hurt farm bank accounts.
Investors are most likely to look at the sources of growth between the two companies. Caterpillar’s growth is mainly coming from selling mining equipment to overseas companies. Deere, on the other hand, is seeing its largest growth from making forestry equipment sales and domestic construction.
There isn’t too much optimism in the mining industry at this time. In North America, coal is looked at as a tainted product. Since Obama was re-elected, there isn’t much hope that the Democratic administration will ease off on environmental restrictions. China is experiencing slow economic growth, and they are also one of the largest consumers of coal. So you shouldn’t expect any sales in China to boost Caterpillar’s revenue like it may have once been in the past.
On the other hand, Deere is still making about three quarters of its profit in North America, and analysts are predicting that an economic recovery is on the horizon. Caterpillar’s forays into emerging markets like India and Brazil seem to be a much safer bet than their business dealings in China at this time.
Deere’s P/E ratio is currently at 11 right now. This is very low for the stock, even though there number one competitor Caterpillar only has a P/E ratio of about eight. Plus, Deere has a growing dividend, and company earnings cover this more than adequately.
In the short term, the high price of crops will continue to help Deere, because they will fuel a large level of farm activity. It’s also expected that some of the crop insurance checks for drought losses will end up going to equipment purchases.
For the long term, the demand for food across the world continues to skyrocket, and the equipment we use to cultivate this food is desperately in need of an upgrade. You don’t need to be a genius to realize that there is a bright future in tractor sales.