StreetWise: Deere shares may be a timely buy

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Keep in mind that when you invest in individual stocks you are not buying the market or Wall Street or the Dow Jones industrial average.

Rather you are creating partnerships with a minimum of 12 to 15 high quality, dividend paying companies whose self-projected future success coincides with your analysis. And it is especially helpful if they are underappreciated by Wall Street. Or to quote the philosophical wisdom of Warren Buffett, the time to buy anything, particularly stocks, is when they are on sale.

A good example of a company whose shares are on sale, while at the same time having the honor of once being the central theme of a No. 1 song on the country music charts, is none other than Deere (DE). The song, of course, is "Big Green Tractor," written by Jim Collins and David Lee Murphy and recorded by Jason Aldean.

Deere is the world's largest manufacturer of farm machinery. It is also a company that I have received numerous inquiries about from both readers and students. When I wrote about the company a year ago, my earnings estimate for fiscal year 2012 was $7.75, with a 12-month target price on the shares of $94 for a capital gain of 15 percent. While earnings were lighter than my estimate, coming in at $7.63, the shares did reach $94.65 on Feb. 1.

Although February would have been an excellent time to take some money off the table, if you did not or never bought the stock to begin with, do not despair. The recent pullback to the $85 level has created an opportunity to consider this company as a possible investment candidate.

Let's do a bit of analysis. For fiscal 2012, earnings hit a record $3.065 billion or $7.63 per share, as compared to $2.8 billion, or $6.63 per share in 2011. Meanwhile, sales increased 14 percent to $9.792 billion for the fourth quarter and increased 13 percent to $36.157 billion for the 2012 fiscal year.

Moving ahead to the first quarter of fiscal 2013, earnings were $649.7 million or $1.65 per share, as compared to $532.9 million or $1.30 per share during the same period in 2012.

Revenues for the first quarter increased 10 percent to $7.421 billion, as compared with $6.767 billion a year ago. With 11 consecutive quarters of record earnings, Deere has begun 2013 on a positive note and is setting the stage for another prosperous year.

To that end, Deere remains well-positioned to earn solid profits despite a fragile world economy and will benefit longer term from the latest trends in global farming.

Despite a 175-year history, Deere can best be described as a new unfolding story of rapid growth. Perhaps its most exciting goal is to achieve sales of $50 billion by 2018. That would mean a near doubling in size over the next five years. An extraordinary feat no doubt, but it is one that fits neatly into the current trend of global growth in farming.

Looking at Deere's intrinsic value, a discounted earnings model suggests an intrinsic value of $119 per share using a 12 percent discount rate and a 9 percent growth rate. The more conservative free cash flow to the firm model returns an intrinsic value of $217 per share using a discount rate of 7.31 percent, which is the company's weighted cost of capital.

My earnings estimate for Deere in FY 2012 is $8.76 with a projected 12-month share price of $98, yielding a capital gain of 15 percent. There is also a 2.4 percent dividend yield.

bizopinion

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com


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