Deere & Company: The Undervalued Blue-Chip Gem Poised for Long-Term Growth

Deere & Company, commonly known as John Deere, stands as a global titan in the agricultural machinery sector. With a robust history dating back to 1837, Deere has evolved into a financial powerhouse, boasting a market capitalization exceeding $100 billion. Despite a nearly 9% year-to-date decline in its stock price, attributed to cyclical downturns and a subdued profit outlook, Deere presents a compelling opportunity for long-term investors. Trading at a forward P/E of 14 and approximately 1.8x sales, the stock appears undervalued. This thesis argues that Deere’s solid fundamentals, dividend growth, and potential for profit rebound make it a strategic addition to any long-term portfolio in 2024.

Historical Context and Personal Connection

Deere’s reputation and historical performance resonate on both a personal and professional level. The company’s strong brand presence and financial stability have made it a staple in many investment portfolios, including my family’s, which divested at peak valuations. In hindsight, maintaining a position would have leveraged Deere’s consistent dividend growth and robust financial health, reinforcing the importance of long-term investment perspectives.

Dividend Growth and Financial Performance

Deere is distinguished by its shareholder-friendly policies, particularly its commitment to dividend growth. The annual dividend has increased from $3.04 per share five years ago to $5.05, more than doubling over the last decade. This growth trajectory, temporarily paused during the COVID-19 pandemic, has accelerated since 2022, reflecting Deere’s solid financial performance and strategic capital allocation.

Financial Highlights:

• Dividend Growth: Averaged 18.5% per year since 2021.
• Return on Equity (ROE): Consistently exceeded 35% since 2021, reaching 48% in 2023.
• Return on Invested Capital (ROIC): Improved from low single digits to 12.9% in 2023, demonstrating enhanced competitive positioning.

Current Market Sentiment and Cyclical Nature

Deere’s recent underperformance is tied to a conservative profit outlook and inherent cyclicality in the agricultural sector. Despite beating recent earnings estimates, the company revised its net income expectations downward, causing short-term investor sentiment to falter. However, this presents an opportune moment for long-term investors to accumulate shares at a lower valuation, anticipating a cyclical rebound.

Potential for Profit Rebound

Market participants often prioritize short-term gains over long-term stability. Deere’s current downcycle is expected to bottom out within the next year, setting the stage for a re-rating as the market anticipates improved performance in 2025 and 2026. Historical patterns suggest that buying Deere during downcycles has been a successful strategy for long-term gains, as seen in past cycles such as 2016 and the COVID-19 dip in 2020.

Risks and Debt Management

A significant consideration is Deere’s debt, primarily tied to its financial services division, which facilitates equipment financing for farmers. Deere’s debt management and low leverage ratios (e.g., EBITDA leverage of 0.7x) underscore its financial resilience. With a Fitch rating of ‘A+’ and a stable outlook, Deere’s debt is managed effectively, even in a rising interest rate environment.

Conclusion

Deere & Company stands out as a blue-chip bargain in 2024, marked by a solid financial foundation, attractive valuation, and strong growth prospects. The stock’s forward P/E of 13 and 1.7x sales ratio further enhance its appeal. Despite short-term cyclical challenges, Deere’s long-term potential, driven by dividend growth and strategic market positioning, makes it an ideal buy-and-hold investment. Investors should consider accumulating shares on market weakness, leveraging Deere’s enduring market leadership and financial stability for sustained long-term returns.