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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


June 24th 2011 Deere
NYSE Symbol: DE
Industry: Trucks & Tractors
Price as of 6/24: $79.98

A brief four day rally brought the sellers back in as the economic numbers have not improved. Some of the recent weakness is due to the Japanese tsunami, but how much is the big question. Many economists believe the economy will pick back up in the second half of the year, but Wall Street is not so certain. Throw in concerns about the end of QE2 and the debt crisis in Greece and its' easy to see why investors remain on the sidelines. I year ago this time, we highlighted a number of blue chip stocks trading for 10 times earnings, sporting yields of 3% or more. ExxonMobil was actually trading below the Great Recession lows sporting a dividend yield of 3.1% which remains above the 10 year Treasury bond. Since then, Exxon Mobil rallied over 50% and remains up over 35% not including the dividend. Chevron and Merck's dividend yields were above 4%. Intel's was 3.3% and remains above 3% thanks to another dividend hike. The best dividend yields went to Verizon and AT&T at 7%, Altria was at 6.9%, and Philip Morris was 5%. All four have performed well since last year. This week we'll feature another blue chip industrial that has pulled back and goes ex-dividend next week. The stock of the week is John Deere. John Deere is so much more than your father's tractor company. While they remain a top pick among consumers, John Deere has super-charged their earnings expanding overseas with their industrial agriculture and construction tractors. A recent dividend hike and news of further expansion in China modes well for the fundamentals of John Deere and their stock.

Back in May, Deere reported record earnings of $904.3 million, or $2.12 per share, for the second quarter up 65% from last year, easily beating estimates by 6 cents. Earnings are being driven by sales of large farm machinery, particularly in the United States, Canada, Brazil, and of course China. Construction equipment shipments have also improved in spite of lingering weakness in the residential and commercial construction sectors. Worldwide net sales and revenues increased 25% to $8.910 billion, for the second quarter and up 26% to $15 billion for the six months. Net sales of the equipment operations were $8.328 billion for the quarter and $13.841 billion for six months, compared with $6.548 billion and $10.785 billion for the corresponding periods last year. Management made comments that the strong second quarter bodes well for the full year. Breaking down the results, equipment net sales in the United States and Canada increased 17% for the quarter and 24% year to date. Outside the U.S. and Canada, net sales rose 45% for the quarter and 36% for six months. Company equipment sales are projected to rise 21% to 23% for fiscal 2011 and up about 20% for the third quarter compared with the same periods a year ago.

The recent pullback in Deere's stock has provided a better entry point particularly since the fundamentals remain strong. Currently, Deere's stock is trading for 12.8 times earnings, 11 times 2012 earnings, and 1.1 times sales. The stock also trades for 4.6 times book value. As mentioned, Deere goes ex-dividend next week on June 28th for 41 cents. Back in May, Deere hiked their dividend 17, another good sign that the fundamentals remain strong. Deere is tied to the commodity sector so business will be volatile, but longer term the world needs more food and Deere will continue to sell agricultural products to Brazil and China. Case in point, Deere is investing $60 million in another new facility to expand production in China. The broader market correction is probably not over, but at these valuations, Deere provides attractive long term valuation.