The agriculture industry has had a tough year in 2013. With the prices of key grain commodities, including corn, beans and wheat falling sharply after surging to record highs in the summer of 2012, agriculture stocks have underperformed the broader market in the first half of the year.
That weakness shows up in one of my favorite agriculture-focused ETF's, the Market Vectors Agribusiness ETF (MOO), sharply trailing the S&P 500 with a loss of 6% on the year.
But that short-term weakness is creating a big opportunity. Because long-term, the agriculture industry is already in a long-term bull cycle as the world struggles with limited food resources amongst surging demand.
In fact, the United Nations Food and Agriculture Department has warned that the world is already facing a food crisis in 2013 as consumption increases while production lags and inventories are depleted. That is creating a secular bull market in agriculture and presenting an opportunity for investors to cash in.
One of my favorite ways to play that bullish trend in agriculture is with Deere & Co. (DE). Deere is already a global leader in the tractor and farming equipment market, with a distribution network that stretches across the globe and market cap of $31 billion. And that places the company in the perfect position to capitalize on long-term growth in the food and agriculture industry.
There are two keys to the company's long-term success.
The first is its emphasis on high-growth emerging markets, particularly Brazil. As one of the world's largest producers and exporters of agricultural goods such as beans and coffee, Brazil is driving demand for farming and tractor equipment. Deere has been making big moves to cash in on that growth, investing $180 million into two new production facilities in the high-growth emerging market.
That dynamic showed up in Deere's recent Q3 results, forecasting 20% revenue growth in 2013 in the South American market compared to just 5% revenue growth expected from its biggest markets in the U.S. and Canada. Deere will also benefit from lower penetration rates in South America markets as the region continues to grow from its booming commodities and agriculture industries.
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The second key to Deere's long-term success is its leading position in developed economies including the US and Canada. In spite of recent weakness in crop prices, the US Department of Agriculture is projecting farm income to rise by 14% in 2013, totaling $128 billion. Those billions of dollars of income will be reinvested by farmers and producers, with an emphasis on upgrading older machines or simply buying new ones. Although not growing as quickly as it's the South American region, North America is a huge market for Deere that continues to deliver steady sales and earnings growth.
In addition to sales and earnings growth, Deere also carries a solid dividend yield of 2.5%.
On the earnings front Deere is expected to grow earnings by 12% this year and 9% annually in the next five. That's not exactly jaw-dropping growth, but Deere is a steady market leader in position to deliver steady and predictable returns. That is the right model and goal for a solid blue chip like Deere.
But the best part of Deere right now is its valuation. Its forward P/E of 10x is a huge discount to its 10-year and peer average of 13x.
The Takeaway
Looking ahead, Deere will be facing some headwinds, with slow growth in Europe and rising production costs weighing on margins. But big picture, this is a great company and stocks for investors that are bullish on the long-term trend in agriculture. If shares simply traded with the same valuation as its peers, Deere would jump to $106, a 30% premium from current levels.
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