Rising food prices have bumped up agricultural and fertilizer stocks. So far this year, the World Food Price Index, which measures a basket of basic food supplies, is holding steady at historic highs. The upshot: Despite bad credit conditions, farmers have more cash for equipment. And Deere & Co. (DE), the world’s largest agricultural equipment maker, is eager to supply them with tractors and combines.
The strongest sales come from the United States, Canada, and Brazil. Making inroads into new markets, such as China, is also a priority. Deere is profiting handily so far. Second-quarter revenues rose 25 percent to $8.9 billion year over year. Net income jumped 65 percent, driving more dividend growth.
Deere boosted its dividend 17 percent. Altogether, dividends have risen 273 percent since 2004. A $3.95 billion reserve is in on hand to bankroll more increases.
Rosy forecasts aside, Deere does have some weaknesses. For example, higher raw material costs may dampen margins short-term. Yet Deere CEO Samuel Allen has set ambitious goals. He forecasts 20 percent-plus sales growth in 2011. By 2018, he aims to double Deere’s annual sales to $50 billion by beefing up overseas sales.
Ready to reap
UBS analysts are bullish on 2011 farm equipment sales, ratcheting up their forecast 10 percent more for the year. UBS also upgraded Deere, a favorite farmland play, to a buy recommendation from neutral.
Other analysts agree. Of the 18 analysts tracked by Thompson/First Call, six have strong buy recommendations for Deere, with six buys and six holds.
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