We all know Warren Buffett's fondness for farm analogies and
the heartland, so perhaps it's no surprise that his Berkshire
) team picked up a stake in tractor maker Deere & Co. (
) last quarter. But Buffett's not the only smart guy buying Deere
John Rafal of Essex Financial Services, an independent famous
for good individual stock picks, likes Deere's combination of
income (there's a 2.2% dividend yield now) and growth. So does
Neel Kashkari, managing director of fund giant Pimco. Thomas
Russo of Gardner Russo & Gardner has been adding Deere to his
hedge fund all year.
Perhaps the bigger surprise here is that Deere shares are now
more popular with value investors than those of its arch rival
). Caterpillar is the world's biggest maker of construction and
farm equipment, which happen to be Deere's core businesses too.
Caterpillar's annual revenues are near double Deere's, and its
market cap of $53.52 billion market cap compares to Deere's
With that background, Cateripillar shares historically have
been the star performer to Deere's mediocrity. But the past six
months, the trend has been reversing. Deere shares are up 13%; to
Caterpillar's are down 11%, as seen in a
So what's the difference? Both companies did very well in
2011, when high crop prices fueled a lot of farm equipment
buying. Sales at both companies were hurt when this year's
drought crimped farm bank accounts. But investors are probably
looking more at differences in their sources of growth recently.
Caterpillar's growth of late has come from selling mining
equipment, often overseas. Deere's biggest growth comes from
domestic construction and forestry equipment sales.
Industry analysts are not optimistic about mining at the
moment. Coal remains a tainted product in North America, where
the re-election of a Democratic administration canned any hope
that environmental restrictions would be eased. China is one of
the biggest consumers of coal, but slowing economic growth there
also means that sales there won't push up Cat's overall revenues
as hard as it has in the past.
Deere, on the other hand, still collects about three-quarters
of its revenues in North America, where analysts see economic
recovery on the horizon. Its forays into emerging markets in
India and Brazil look safer than Caterpillar's hold on China
ISM Manufacturing Production Index
is at about 11 now, which is very low for the stock even if
Caterpillar is cheaper at a
of about 8. Deere has a rising dividend that earnings more than
Short-term, high crop prices are expected to help Deere, as
they fuel a high level of farm activity. Some of those crop
insurance checks covering drought losses will surely go to
equipment purchases. Long-term, the world's demand for food
continues to skyrocket, and the world's equipment for cultivating
it is in desperate need of upgrade. It doesn't take a lot of
smarts to realize there's a future in tractor sales.
Dee Gill is a contributing editor at YCharts, which
includes the just-released
YCharts Pro Platinum
for professional investors.