If you had invested $10,000 in Deere 20 years ago, here’s how much you would have today
The answer is $170,000. This is how much you would have now if you had invested $10,000 in Deere (OF 0.45%) 20 years ago. That’s a great return for a large-cap company, because elephants aren’t supposed to be able to gallop. Also, what is remarkable about Deere’s stock performance is that it has tripled over the past five years. The company has done something right, because its returns eclipse those of the S&P500 and his peers like AGCO and CNH Industrial. Here’s a look at what makes the agricultural machinery company so unique.
Why Deere Stock Outperformed
There are a few key reasons Deere has outperformed in recent years:
- After half a decade of sluggishness, the prices of major agricultural commodities such as soybeans, corn and wheat have increased significantly in recent years (see chart below).
- The company’s leadership in smart farming solutions has added significant value to its equipment and kept farmers loyal to Deere’s equipment.
- Management’s acquisition policy has been excellent in growing its precision farming (smart farming) business and diversifying its end markets by acquiring a major road construction equipment manufacturer, Wirtgen, in 2017.
As noted above, agricultural commodity prices have recently reached historic highs, which is great news for farmers. It’s also great news for Deere, as it encourages farmers to replace aging equipment. It’s also timely because it coincides with a time when Deere is aggressively rolling out its precision farming solutions – more on that in a moment.
Excellent acquisition history
Deere is best known for its large and small agricultural equipment, but it also has a construction and forestry segment that easily contributes to profitability. For example, the segment contributed $1.5 billion to operating profit in 2021, compared to $2 billion for smallholder agriculture and turf and $3.3 billion for production and precision agriculture. .
Additionally, the acquisition of Wirtgen for $5.2 billion strengthened Deere’s position in road construction machinery and helped diversify its revenue streams. This is a major asset for investors and the company because it ensures a level of profitability and cash flow. That’s important because Deere will need cash to invest in its business, even when its core farm machinery business experiences weak conditions.
Deere’s acquisition strategy is an integral part of its precision agriculture strategy. Precision farming solutions use real-time data collected from internet-connected devices to help farmers make the right decisions in an industry full of uncertainty. For example, land preparation, planting, tending and harvesting are critical decisions that greatly affect crop yield.
Deere’s technology solutions are deeply integrated into its hardware. For example, it has technology to control spraying and monitor and control fertilizer application, and solutions that use data to guide planting, spraying and harvesting. It’s a set of solutions that Deere has built through organic investments and acquisitions, like the 2017 acquisition of Blue River Technology, creators of see-and-spray technology to precisely spray herbicide.
Harvest Profit, an agricultural profitability software provider, was purchased in 2020, and Bear Flag Robotics was purchased in 2021. The latter is a developer of self-driving technology that can be retrofitted to existing tractors.
Deere’s leadership in precision agriculture has encouraged its peers to follow in its footsteps and make acquisitions in the space. It combines the right technology at the right time (as crop prices recover), and Deere reaps the rewards. Whether $10,000 invested in Deere now will get you to $170,000 in 20 years is debatable. However, no one will argue that Deere is not the market leader in an industry (precision agriculture) that is only just beginning to improve global crop yields. Thus, investors can expect increased earnings growth in the future.
Lee Samaha has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.