Daily Gains Letter

The Big Green Giant Generating Record Earnings

By for Daily Gains Letter | Feb 15, 2013

Yellow bulldozer raked pile of coinsThere are still a lot of companies reporting fourth-quarter earnings results and the numbers continue to be mediocre. Companies are often beating on earnings, but coming up short on revenues. Outlooks for 2013 are also highly conservative, but that’s understandable given all the uncertainty. There’s no way corporations are going to stick their necks out in this economy. The stock market is holding up very well right now.

One company that reported very good numbers and I think boasts a solid outlook for the next several years, both operationally and on the stock market, is Deere & Company (NYSE/DE). Deere manufactures everything from lawn tractors to agricultural combines. The company’s latest earnings report was very solid.

The company recently announced record fiscal first-quarter earnings of $649.7 million, or $1.65 a share, way up from $1.30 a share in the comparable quarter, which beat the Street. Global revenues grew 10% to $7.4 billion in the first quarter of 2013; the company forecasts equipment sales will grow about six percent in all of 2013, which is pretty darned good, considering.

On the stock market, Deere recovered strongly from the 2008/2009 financial crisis, but was trading range-bound the last two years. I see the company (and its stock market performance) in breakout mode now, riding the commodity price cycle’s migration into agriculture.

The stock market is in the process of topping out with low trading volume and rising prices on mediocre news. There is a real lack of uniformity in U.S. economic growth and you have companies like Deere doing well, while other big-ticket manufacturers are slow.

February will soon be at a close and first-quarter earnings season is around the corner. Corporations have done an excellent job of keeping expectations low so they can “outperform” come earnings season. I see the stock market bouncing around without trend until the next earnings season begins, which will be the catalyst for correction or not.

Deere is the kind of company that an equity investor can acquire over time if you believe in the strength of agriculture going forward. On the stock market, the position currently boasts a two-percent yield and is very fairly priced.

Before the 2008/2009 financial crisis and recession, Deere was a powerhouse wealth creator for shareholders. From 1995 to 2007, the stock appreciated ninefold, not including dividends. Then, during the crisis, it gave up almost all this gain, only to gain it all back in 2009/2010. No doubt, Deere is a solid business and a great brand; but, on the stock market, it serves to illustrate that even solid large-cap companies can be extremely volatile.

I believe in the commodity price cycle and its migration to the agriculture sector. I also believe that agricultural-related investments will be rewarding going forward. Not every investor can go buy land and become a farmer, so they’ll be looking to the stock market for opportunities. Within the sector, there is momentum in agricultural earnings. It’s a trend with real staying power.

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