The Rising Influence of Rising Affluence

[DewDiligence]

Barron’s_Roundtable_contributors_bullish_on_DE—despite_big_gain_in_past_year (see my annotations at bottom):

https://www.barrons.com/articles/22-ways-to-invest-in-the-future-according-to-barrons-roundtable-51611966768

[Todd Ahlsten, Parnassus Investments]: Deere (DE) is…up 70% since [Jan 2020] …but the party is just beginning.

Deere has a $94 billion market cap. Three-quarters of the business is agricultural equipment. The company also makes construction equipment. Since I last spoke about Deere to this group [one year ago], the adoption of the company’s precision ag tools has tripled. That’s why I’d like to double down on this name again.

[Barron’s moderator]: What are precision ag tools?

[Ahlsten]: I’m referring to combines and sprayers and planters connected to the internet. Deere’s operations center now has over 200,000 connected machines on 190 million engaged acres across the U.S. Again, I can’t emphasize enough that use has tripled in the past year. This is a really key point because it helps take the long-term cyclicality out of the business. Over the next decade, we think Deere is going to transform itself from primarily selling those iconic green tractors to being a connected software company. In the long term, it will see higher returns on R&D spending. An upgrade cycle lies ahead. A lot of equipment is aged, and we’re starting to see inflation in some commodities. In the next three years, not only the equipment cycle but demand for connected devices could take off.

Deere’s annual revenue is about $36 billion. We estimate about $2 billion of that is precision ag equipment, up 40% in the past 12 months. Over the next decade, the use of those tools will go up parabolically; this could become a very large franchise for Deere. Then, from an ESG standpoint, these tools help save water and reduce pesticide and fertilizer use. They also increase the value of acreage and help farmers make more money. Deere is one of the wider-moat companies we’ve seen, and has one of the most extensive dealer networks.

We expect Deere to earn well over $20 a share in the fiscal year ending in October 2024. The stock has been trading around $300. It could run to $500 over the next three years.

[Mario Gabelli]: Deere just did something I have never seen Deere do: They bid on wireless spectrum in a license auction. I speculate they’re going to use that spectrum to connect their factories’ equipment, dealers, and the farmer.

[Henry Ellenbogen, Durable Capital Partners]: What is also unique about Deere is that they are so trusted by their customers. Deere is a beloved brand because it helps its customers solve problems. ESG issues matter: If you are an extractive company, customers will want to transition away from you.

Emphasis added.

DE’s Precision Agriculture business was first mentioned on this board in 2014—see #msg-103577111. A timeline of DE’s technology acquisitions can be found in slide #14 at https://s22.q4cdn.com/253594569/files/doc_financials/2020/q4/4Q_2020_Earnings-Call-Presentation.pdf .

Disclosure: I’m long DE, but I haven’t added in quite a while due to the relatively high valuation (#msg-159719099). I'm not sure I fully subscribe to the Barron's valuation thesis laid out above, although I can't say it's clearly wrong.