Deere Is Ready To Bounce Back

Nov.20.13 | About: Deere & (DE)

The farm and construction machinery industry was hit hard by the recession. Now the agriculture sector is growing rapidly around the globe, and companies like Deere & Company (NYSE:DE) are performing pretty well. Deere's products are well known for their reliance and durability. In addition to agricultural products, the company also produces construction and forestry equipments.

Growing population around the world presents a positive picture for agricultural-equipment-industry players. Growth in agriculture industry primarily depends on two factors: population growth and food consumption. The world's population is expected to hit 9.7 billion in 2050 and nearly 11 billion in 2100 from the current level of 7.1 billion. Population growth will mostly come from Asian countries, such as China and India. The population of the Americas will rise to 1.2 billion by the middle of the century from the current level of 958 million.

Agriculture is a major industry in the U.S. With the increase in population, demand for food will also increase. To meet the food demand, food production needs to be increased, as a result farms will make investments to buy agricultural equipments. According to projections, agricultural production must be 60% higher than in 2005/07 to meet consumption in 2050. Farm mechanization and increasing the use of agricultural machinery is important for enhancing agricultural production. Global demand for agricultural equipment is expected to increase 6.7% annually through 2016 to $173.5 billion.

Deere is well known for its tractors and generates a significant revenue from the sales of tractors. World demand for tractors will increase 6.8% per year through 2016 to $122 billion. Farm tractors were the largest product segment in 2011, and will continue to account for the largest share of product sales in 2016.

Deere, the world's largest farm equipment maker, generates more than 60% of its revenue from the U.S. and Canada (combined). United States is the largest agricultural exporter in the world. Strong farm incomes will increase the demand for farm machinery. Net farm income, a key indicator of U.S. farm well-being, is expected to reach $120.6 billion in 2013, up 6% from 2012 but down from the $128.2 billion forecast in February. Farm production expense will increase by 3.8% this year.

Deere is quickly expanding its operations in emerging markets. The company has a goal of generating nearly 50% of its sales outside of U.S. & Canada. Deere has found some promising new markets such as China, Brazil and India. The company is investing heavily in China, and intends to invest further in China in the coming years.

China's remarkable growth in the agricultural sector has made a significant contribution in dropping poverty in the country. China will provide great growth opportunities to Deere, as the country need to boost food production when the population rises. The country's food consumption is expected to outstrip its production growth by nearly 0.3%. China is moving millions of people from rural areas to urban areas. China plans to migrate 400 million people to cities. Urbanization will lead to a reduced workforce in farms, as a result more efficient machinery will be needed to offset the effects of this lower workforce and a relative increase in arable land. China's urbanization will also increase the demand for construction equipment.

Deere has a dividend yield of 2.50%. Due to excellent growth opportunities in the international market, the company will keep its investors happy for years to come. The dividend payout ratio of Deere is only 22% which makes its dividend very sustainable. The company's Return on equity (ROE) ratio is 42.7%, much higher than its peers. The higher ratio means Deere has a great management that would make a lot of money for its investors in the long run. The company's debt/equity ratio is little high, but with higher ROE, I believe the company will deal with its debt properly.

Bottom Line

Economic growth and population indicators suggest the strong upside potential for Deere. The company seems to be growing in the international market. China and other Asian countries are modernizing and expanding their infrastructure, that will require modern and efficient products. This will in turn increase demand for agricultural equipment and increase the presence of Deere in these developing markets. The long-term future of the company looks good. In my opinion, investors should add Deere in their portfolio.
