Why Deere's Stock Is Cheap

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Did you also sell-off Deere's (NYS: DE) shares merely because its first-quarter revenue fell below analyst expectations and the company forecasted lower prices for some crops? Well, I believe it's wiser to judge a company on the basis of its operational performance and business outlook rather than any macro estimates it might make.  

Deere is projecting its full-year net income to be $3.28 billion, which is way above its record-high net income of $2.8 billion recorded last year. And it is expecting ag-related equipment sales to go up by 15% this year. Where is the problem? I see nothing standing in the path of a John Deere tractor at this point.

No need to worry
Deere's projection of 15% higher agriculture equipment sales looks reasonable. The company might be expecting lower prices for corn, wheat, and soybeans this year, but that doesn't mean its sales will fall off the cliff. Even if prices decline a bit, demand for essential crops like corn is likely to stay put because the world will not stop eating, and so farmers will not stop planting.

In fact, most industry players have reported good numbers and are expecting higher sales this year. AGCO (NYS: AGCO) , another manufacturer of ag equipment, is targeting full-year sales of over $10 billion, up from the $8.8 billion it registered last year backed by strong demand. Further, another equipment maker, CNH Global (NYS: CNH) , has forecast that firm crop prices will take the demand for its agriculture equipment up by around 5%.  

I've got support ...
Although agriculture remains the key business for Deere, let's not forget its construction and forestry business that continues to add much value. The segment contributed nearly 23% to Deere's total equipment sales in the first quarter. Sales climbed a healthy 22% backed by higher volumes and prices, and operating profits rose an astounding 41%.

Deere has raised its sales-growth forecast for the segment to 18% from the previous 16%. What's more, the company is investing big-time in the segment, from entering the high-potential Brazilian construction market through two new factories in Sao Paulo to expanding existing plants. This business looks ready to take off.

The Foolish bottom line
Deere delivered in 2011 with a record number of product launches and expansion plans, but it would be unreasonable to expect the company to do it every year. I favor the company's conservative full-year guidance, because setting realistic goals and hitting those targets seems more reasonable than setting unattainable expectations.

One must also not overlook the 175-year-old stalwart's strong balance sheet and impressive dividend growth. I like Deere, and I won't let temporary price movements ride over my decisions for the long haul.

At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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