Markets
DE

3 Reasons Deere's Stock Could Soar

DE Chart

Deere 's share price has struggled in the last couple years and is now almost flat from where it was in 2011. Essentially, Deere hasn't participated in the broader market rally because investors have been pricing in the effect of declining crop prices on demand for its agricultural equipment. In issuing its third-quarter results, Deere management downgraded expectations for equipment sales and net income for the full year. With that said, there are three key reasons why the stock could outperform going forward.

Deere faces challenges

This article will focus on outlining the upside potential for Deere. For some background, Fools can find out more about Deere's recent results here , and read about the five key takeaways from the company's earnings conference call here .

Conditions are likely to get tougher in the near term for Deere, as the company and the U.S. Department of Agriculture have both lowered expectations for future key crop prices. Lower crop prices (principally for goods such as soybeans, cotton, corn, and wheat) affect farmers' income and therefore their willingness to pay for agricultural machinery.

The consensus may be wrong

Simply put, the single biggest driver of Deere's stock price is key crop prices, such as corn and wheat. In fact, the agriculture and turf made up more than 80% of revenue in the first nine months of Deere's fiscal year, and the following chart demonstrates the relationship between crop prices and Deere.

With that said, the consensus opinion (including the USDA and Deere's management) is that crop prices will be lower in 2014 & 2015, but ultimately who knows? Who can ultimately predict what the weather will be like?

DE Chart

Moreover, conditions are different from 2008. First, the same hedge fund speculative fervor does not appear to be built into commodity prices, so the fall in crop prices might not be so dramatic. Second, the last recession was about credit, and farmers found it hard to get financing to buy equipment. Indeed, Deere's own financial services arm recently reported that its provision for credit losses (a good credit quality indicator) was at a minuscule 0.1%.

China is likely to increase farming subsidies

The third reason for optimism on the stock is that one of Deere's key growth markets, China, looks set to increase farming subsidies. According to a Reuters article China is set to increase farming subsidies by 10% in 2014. Moreover, China's subsidies only make up 3% of farmer's income, whereas in Western economies the figure is generally around 40%.

China is under increasing pressure to ensure self-sufficiency in food as increasing urbanization and economic growth is creating a burgeoning middle class that is hungry for protein. Fools already know about Deere's exposure to China from an article linked here .

The takeaway

Deere's near-term prospects don't look great, but sometimes that is the best time to buy the stock. No one really knows what the weather will be, market conditions are not the same as they were in 2008, and emerging economies, like China, are keen on increasing farming subsidies. For these three reasons, Deere could be a stock to buy.

Leaked: Apple's next smart device (warning, it may shock you)

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here !

The article 3 Reasons Deere's Stock Could Soar originally appeared on Fool.com.

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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 .

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

DE

Other Topics

Stocks

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More