October 21, 2012 in Business

Demand for Deere’s products makes stock an attractive buy

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The agriculture industry isn’t likely to disappear anytime soon, and that’s a plus for Deere (NYSE: DE), the world’s largest manufacturer of agricultural machinery.

Deere commands a 50 percent market share in the United States and generates more revenue than most of its competitors combined. While it gets 60 percent of its sales from the U.S. and Canada, its latest annual report details plans to build factories in faster-growing China, Brazil and India.

Morningstar gives Deere a healthy “A” credit rating, but equipment manufacturing is a very capital-intensive business, and Deere’s debt-to-equity ratio is a rather high 4.2.

The United Nations estimates that farmers will need to double food production by 2050 to keep up with the demands of a swelling population. Tractors can go a long way toward solving that problem, as they greatly increase a farm’s efficiency. The United States is a huge market, and its farmers need to replace or upgrade their equipment periodically. But the real opportunity is in the developing world, where tractor use is still relatively rare.

While Deere’s international sales are growing, it’s still mainly focused on the U.S., leaving the door open for its smaller and more nimble rival AGCO, which does much more of its business internationally.

Deere’s dividend yield was recently 2.3 percent. Take a closer look under the tractor’s hood, if you’re interested.

Ask the Fool

Q: When it comes to earnings per share (EPS), is it best to seek companies with a high EPS? – G.M., Joplin, Mo.

A: The earnings per share amount is rather meaningless by itself. Here’s why. Let’s say that Cute as a Bug Exterminators (ticker: ICANT) has total net income of $40 million this year. If it has 40 million shares of stock outstanding, then its EPS is $1 ($40 million divided by 40 million is 1).

If it issues more stock, and suddenly has 50 million shares outstanding, its EPS will be lower, at $0.80 ($40 million divided by 50 million).

Imagine two equally promising companies with identical net income. If one has half as many shares as the other, its EPS will be twice as big. That doesn’t mean that it’s a better or worse company. There’s no perfect number of shares for a company to have. Some have millions and some have billions.

Instead, check that EPS has been rising over time and examine many other numbers, too. Keep in mind that even net income may not be as meaningful as you think, since a company’s earnings can be manipulated legally via various accounting maneuvers.

Q: How can I look up inflation’s effect over a certain period? – C.H., Maryville, Tenn.

A: Click over to the Bureau of Labor Statistics website, and you’ll find a handy inflation calculator. (Here’s the direct address: data.bls.gov/cgi-bin/cpicalc.pl.) To see, for example, how much buying power $100 in 1990 would have today, just plug in the numbers. The answer: $177.

Another good calculator is at westegg.com/inflation. To learn the average inflation rate over a period, visit measuringworth.com/inflation. (Between 1990 and 2012, it averaged 2.6 percent.)

My dumbest investment

I bought a huge position in Alaska Communications Systems back in September 2011, as it was offering a massive double-digit dividend yield. I didn’t follow it closely, though, and in November I realized that the stock had fallen sharply on news that the company was considering a dividend cut. It fell more in December, when the payout was cut by 77 percent. I had been thinking Verizon would buy the company and send the shares up. At least I did sell half my shares and moved that money into a stock that grew. – P.C., Woodbridge, Conn.

The Fool replies: Verizon didn’t buy Alaska Communications and actually ended up moving into its territory to compete more. Alaska is still around, though, and recently offered an 8.8 percent yield – but that’s largely because the stock price has fallen so much. You were smart to move some of your remaining money into a stock that inspired more confidence. It’s always best to keep our money in our best ideas, and it’s silly to wait to recover losses in companies where we’ve lost faith.

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