Last week, John Deere (NYSE:DE) posted yet another bumper quarter. Revenue grew 20%, and profit rose to $669.6 million from $457.2 million in the same period a year ago.
For the most part, Deere has been a consistent grower: The company’s shares have generated a compound annual growth rate of 32.7% for the past three years.
Yet this year, the stock price is off nearly 10%. Might investors get an opportunity to get a value on this growth company?
Global powerhouse. Founded 175 years ago, Deere’s brand is one of the best in the equipment industry. The company’s product offerings span diverse categories like balers, combines, loaders and mowers.
Interestingly enough, Deere also has a segment for forestry and construction equipment that includes backhoe loaders, log skitters and earthmovers.
Innovation. Deere spends substantial amounts on research and development. That can be a drag on profitability, but the long-term benefits are significant. The company’s products command premium pricing and tend to have strong resale values.
Farm boom. Based on Deere’s analysis, it looks like 2012 will be another strong year for the agriculture sector. Corn is forecasted to $6.40 a bushel from $5.75 a bushel. At the same time, total cash receipts for famers are expected to grow to $374.2 billion. This will likely be a key driver for equipment sales.
Competition. Even though the farm equipment industry is fairly consolidated, the competitive environment is still intense. In the farm equipment industry, rivals include AGCO (Nasdaq:AGCO), CNH Global (NYSE:CNH), Kubota Tractor (NYSE:KUB) and Toro. As for the construction and forestry segment, some of the competitors include Caterpillar (NYSE:CAT), Komatsu, Volvo Construction Equipment, Tigercat Industries and Ponsse.
Volatility. Over the decades, food commodities have seen wide swings in prices. Some of the factors include weather, the economic environment and growing conditions. If there is a global glut – which can easily happen — the impact is likely to be severe for companies like Deere.
Government regulations. Changes in tariffs and other trade policies can be significant for Deere. At the same time, more countries are implementing requirements to lower emissions. While Deere has been proactive with these changes, it still means higher overall costs.
Deere is likely to benefit from strong secular trends in global agriculture. Of course, a key force is the rising affluence in China, Brazil and India. Deere plans to build six plants in these countries over the next couple years. Revenue has surged 31% in international markets. In other words, Deere’s brand is certainly getting traction outside North America.
In light of the long-term prospects – as well as the near-time impacts from higher farm income — the pros outweigh the cons on the stock.
Tom Taulli runs the InvestorPlace blog “IPOPlaybook,” a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.