Deere: Not Just Tractors

04/10/2015 8:00 am EST

Focus: STOCKS

Stephen Leeb

Founder and Research Chairman, Leeb Group

We’d bet that most people would immediately associate our featured recommendation with the word “tractor,” suggests Stephen Leeb, editor of The Complete Investor.

And Deere & Company (DE)—a holding in our growth model portfolio—is indeed the leading global provider of heavy-duty equipment used in agriculture.

But there’s more to Deere than food: the company has large and fast-growing operations in a variety of vital infrastructure areas. Its stakes in both agriculture and infrastructure combine to make Deere one of the safest and surest long-term investments you can make.

That’s true despite disappointing results in its agriculture segment in the last couple of years, which reflect temporary conditions that don’t alter the long-term picture. Current projections point to a world population of 9.5 billion by 2050.

More than 6.5 billion will live in relatively affluent urban areas where residents typically demand more protein-intensive foods, which require more grain (as feed for animals). The call on Deere’s state-of-the-art agriculture equipment will be enormous and protracted.

During the past decade, demand for grain has continued to grow. Indeed, demand for corn, arguably the most important food product, has grown each year for a generation.

Exceptionally favorable weather conditions that held down grain prices explain the recent faltering in Deere’s revenues and earnings. But even if such weather conditions became the norm (which we don’t expect), rising demand for food would still almost certainly overwhelm supply in the years ahead.

Deere’s strong and rapidly growing presence in nonfood infrastructure includes its forestry and construction businesses, which are focused dead center on vital worldwide infrastructure needs.

Offerings include state-of-the-art excavators, wheel loaders, and software that lets loggers use Deere’s proprietary foresight technology to wirelessly connect to machines. The businesses have a growing presence not only in North America but also in Brazil and China.

Over the past two years—as agriculture-related operating profits declined by about 7%—operating profits for the other two divisions rose 20% and currently represent 30% of overall operating profits compared with 21% two years ago.

In addition, the company also has a rapidly growing financial services division that helps finance construction and agricultural projects.

Through the growing reach of its infrastructure operations, Deere is making inroads into a market measured in the hundreds of billions if not trillions of dollars.

No wonder that Warren Buffett has taken a large position in the company. We would use any pullbacks in Deere as an opportunity to add to positions.

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