Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.
The company slogan for farm equipment-maker Deere (DE) is “Nothing Runs Like a Deere.”
The same could be said about the company’s stock, which has tripled since its March 2020 coronavirus pandemic low. But it has done so for good reasons.
Farming: The Ultimate Necessity
For decades now, famed investor Jim Rogers has told people to invest in farming and farmland. I found interesting recently that another guy who has made some very successful investments—Bill Gates—has joined Jim Rogers in this line of thinking.
The Realtors Land Institute recently revealed that Bill Gates is now the top private farmland owner in the U.S., with 242,000 acres of arable and grazing land to his name. In other words, even a software tycoon recognizes that a solid (and improving!) investment case exists for the “dull” business of food production.
The United Nations forecasts the world’s population will reach 9.7 billion people by 2050, up from approximately7.8 billion people today. It’s not surprising that an analysis by the consultancy McKinsey shows that crop demand for human consumption and animal feed will double over the next 30 years. To meet this demand, society will have to drive technological innovation to meet the challenges posed by soil degradation, dwindling water resources and a possible rise in global surface temperatures.
Investment in the global food and agribusiness sector is being spurred on by both population growth and increased protein consumption in developing markets, most notably China. Over the next decade, the Organization for Economic Co-operation and Development (OECD) estimates that meat consumption in developing countries will grow five times faster than in developed countries. Overall, the OECD predicts that global meat consumption will rise by 12% this decade.
And this all plays to Deere’s strengths.
Deere in China
China has been trying to increase the efficiency of its farming sector through mechanization. The goal is to improve yields and drive down the marginal cost of production.
Deere has a long-established presence in China. It produces automated farm equipment across half a dozen sites in the country. The company remains a vital cog in China’s rural transformation, despite the U.S.-China trade war that escalated during the Trump Administration.
The agriculture equipment market in China is worth around $150 billion and is projected to grow at an annualized rate of 6% over the next five years. That is great for Deere. But much more important to Deere is the dawning of the so-called fourth agricultural revolution—the digitalization of farming. Artificial intelligence, analytics and connectivity are transforming agriculture.
Deere Leading the Way in Ag Tech
Deere is at the forefront of this revolution. It has been regularly incorporating advanced technologies to improve its crop management products since it began manufacturing ‘Precision Ag’ machines 25 years ago.
Today, the company’s product range offers a range of cutting-edge technologies, from satellite guidance to hands-free USB and wireless systems. Deere’s tech offerings received a big boost in 2017, when Deere brought Blue River Technologies under its umbrella for $305 million. The deal secured specific expertise in the field of real-time autonomous agricultural robots.
Deere’s technologies—including 75 connected software tools—optimize yields and reduce waste through the farming process, from tillage through to harvesting. Its software tool can record what was sprayed, where, as well as prevailing weather conditions. These are all critical pieces in proper crop management. Plants with the same genetic makeup can have very different outcomes based on the consistency of depth and spacing across the fields in which they are planted. Weather conditions and the amount of accessible sunlight are also crucial.
The main takeaway here is that Deere’s tech-led approach takes a lot of the old-fashioned guesswork out of the agriculture equation.
The quest for even more precise data to optimize yields never ends. That’s why GPS is standard on all of John Deere’s biggest machines. More advances will occur in this regard once is rolled out and become more commonplace.
Deere is likely to remain at the forefront of many of the areas in which farming is becoming more and more intertwined with advanced digital technologies. That means its annualized EBITDA growth rate of 10.5% is almost assured and may even rise.
All of this makes Deere a 5-star stock. It can be bought at any price up to $375 a share. And keep in mind that most brokerage firms do allow you to buy fractional shares.
— Tony DaltorioBuy and Hold These 3 Dividend Stocks Forever [sponsor]
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Source: The Growth Stock Advisor