While Congress has yet to work out the major details, it seems very likely that there will be trillions in infrastructure spending in the United States over the next decade. In this fool live Video clip, recorded on September 13, Senior Analyst Asit Sharma explains why Deere & Co. (NYSE: DE) is one of her best ways to invest before the spending spree begins.
Asit Sharma: This company is Deere and the symbol of the DE company. It’s probably one of the best-known brands that is on the list of manufacturers today at least. I really like Deere because over the past seven years I would say they’ve funneled a lot of their investment, research and development, and capital spending into trying to become a more focused company. about technology and I almost think of them more as it’s integrated or technology infused manufacturing than direct manufacturing, I think that says a lot about where they come from.
Now Deere is playing a very big role in the agricultural space, they actually have three business units. The first is precision farming and production, the second is smallholder farming and sodding, and the third is construction and forestry. When we talk about infrastructure, we are actually talking about this last business unit, construction and forestry. But I wanted to talk for a moment about these other two segments, because they are important in understanding why Deere is making such a good investment in infrastructure. The company has really, through acquisitions and the R&D that I was talking about, invested in trying to be the go-to manufacturer if you’re a farm business of any size in the race to get the return on your land. We know that climate change makes it much more difficult to predict yields and harvests.
What Deere has invested in over the past few years, and also as I mentioned in investing, helps farmers use artificial intelligence and automation to get the most out of their crops every year and this helps them turn faster. I see a world in the future where farmers will have to make faster decisions about which crops will suit the conditions in a shorter time frame. We had a concept called crop rotation in the ’70s and’ 80s, the ’90s still exist today, but it’s almost like we’re going to come full circle with this idea that the best use of land is to have a crop rotation. Precision farming where you use data available to the farmer either from a control center or in a field console, if you write in an equipment, you better get the yield from the soil .
Now why is all of this important for infrastructure? Basically, John Deere lifted some of the technology they developed and bought in their precision farming business and shifted it to used equipment on the construction side. If you think about the use of visual optics, the artificial intelligence machine learning that I was talking about, that translates very well into the technology used to build roads. This will be a major part of what Deere can capitalize on when we start spending. In fact, rather than sharing my screen, I want to read a few paragraphs from the last company results conference call verbatim. This is not from the CEO, but from John Stone who is basically leading the global building for the street trade.
Let me give you some examples of how this technology will make our product smarter, safer and more sustainable. The next generation of Deere construction equipment will include a higher degree of our proprietary technology stack, including network control, vision systems and remote monitoring. The roads are going digital and we are well placed to take the lead. We see the state of today where no single machine is used to its full capacity and this inefficiency stems from lack of data, lack of communication and coordination between machines and the different stages of the system. production. Our analysis indicates that cost savings in the range of 15-30% are possible compared to current traditional methods of road construction and rehabilitation. When a three-mile highway rehabilitation project can cost anywhere from $ 1 million to $ 1.5 million, that’s a great opportunity.
He goes on to talk about these technologies in more detail, but the point we all need to catch here is that Deere is really reaping the rewards of its decision to move to a more tech-based manufacturing company and I think they’ve got it. ‘equipment to lead as companies start bidding on these government contracts to repair roads and bridges, wherever Deere can put its equipment. I really like it for these reasons, I also like the fact that the company has stabilized its operating margins above 15%. It was a long term goal expressed by management and over the last couple of years they really got there from an operating margin in the range of 10% to 12% they were able to find the next margin percentage points. This translates into very good cash flow. The company generated approximately $ 4.3 billion in operating cash flow in the first nine months of this fiscal year. They exceed $ 5 billion over 12 rolling months.
This is one of the companies I argued against earlier, Autodesk (NASDAQ: ADSK). It is a fast growing software as a service company that may have more growth potential for the share price. This Deere company is, I think, more capable of having an appreciation of the share price than saying, Pacific Union (NYSE: UNP), but it has similar characteristics in that it has a very large footprint in the market. It’s not going anywhere. It’s very ingrained among those who buy equipment. Its technological stock is second to none after all of these investments over the past few years with a great management team getting rid of that huge cash flow. I think between the three I mentioned, it will be halfway in terms of taking a little more risk. It’s a $ 111 billion market capitalization company.
There is no reason that Deere cannot continue to grow easily at a double-digit rate. I shouldn’t say easily, but I see a very possible doubling over the next five years, especially if we get that component of infrastructure spending. It comes back again to what I said at the very beginning of this little Deere conversation with these three divisions, they have a lot of balance. All three divisions have performed very well over the past few quarters so all the business needs is a flow of capital in any of these three areas and if they see that capital investment on the construction and forestry side, it’s really going to push a lot of extra profit margin, extra cash flow to the company’s financials.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.