“Warren is in the House” went Buffett’s first tweet ever. And so he is, the farmhouse. Two of his most recent buys for the portfolio are Archer Daniels Midland Company (NYSE:ADM) and Deere & Company (NYSE:DE).
Buffett seems to have a nostalgic turn to the portfolio of an iconic America with newspapers and trains and now two famous agriculture stocks. But Warren is not so whimsical to buy dying businesses, all these have reinvented themselves for the 21st century. That American agriculture trade is now a global trade and it is agribusiness, not family farms, he’s investing in.
OMG I bought ADM!
Just last fall two of the names offered at the Value Investing Congress were Monsanto Company (NYSE:MON) and Agrium Inc. (USA) (NYSE:AGU). Why would Warren pick ADM and Deere & Company (NYSE:DE) over those?
Archer Daniels Midland Company (NYSE:ADM) is an Illinois based company that processes commodities like grain, oilseeds, cocoa and other food related items. It is also involved in the manufacture of biodiesel and ethanol. Buffett bought 5,956,600 shares in December, making it a mere .22% of the portfolio compared to Wells Fargo and Coca-Cola both near 20% of the portfolio.
Archer Daniels Midland Company (NYSE:ADM), a Dividend Aristocrat having raised the yield for 37 years, must appeal to Warren’s heavily dividend weighted portfolio. Since he bought much lower at $27 per share, he’s earning more than the current 2.2% yield and the P/E was lower than the current 16.13 ttm. The forward P/E is 11.24 and the PEG is 1.59.
Had you bought with Warren you would have a 20% gain. But Warren never buys because something is a Dividend Aristocrat. Maybe he liked the potential of the deal with GrainCorp, the Australian version of ADM, which was solidified on May1 after ADM finished its due diligence and tendered a cash offer to buy remaining common shares. CEO Patricia Woertz said the buy will help them move into Middle Eastern, African, and Asian markets where demand for protein is growing exponentially.
Warren must have seen something buying into the agricultural commodities trader after one of the worst droughts in America. Most of the larger agribusiness companies have suffered to some extent but Archer Daniels Midland Company (NYSE:ADM) has that ethanol kicker that hedges performance in other divisions. It is the biggest US producer of the biofuel. It has returned to full capacity on its ethanol plants.
The company reported on May 1 Q1 adjusted earnings that disappointed, $0.48 from last year’s $0.78 for net earnings of $269 million although the top line beat expectations. Maybe Warren likes that cash on hand grew to $1.6 billion from $400 million in the year ago period and as mentioned on the call leveraged debt has declined to 28% from 33%. Regarding bioproducts they highlighted that results increased from $39 million to $77 million. (source Seeking Alpha)
Its main competition is Bunge Ltd (NYSE:BG) and privately owned Cargill. Archer Daniels Midland Company (NYSE:ADM)has been in business since 1898 and long time successful businesses are a hallmark of his portfolio.
Warren heart Deere! Smiley face
That could very well be a new tweet from Buffett as he exercises his tweeting chops. Last fall, Warren initiated a position in Deere, another miniscule position of .44% of the portfolio with 3,978,767 shares at an average price of $78.18.
Deere & Company (NYSE:DE), with their iconic yellow and green logo, is the biggest manufacturer of agricultural equipment globally. It also manufactures construction and forestry equipment. At its PEG of 1.04 it is fairly valued here.
Again, one wonders if buying last fall in the face of the drought was another example of his maxim, “Be greedy when others are fearful.” What does he like about Deere & Company (NYSE:DE)? What’s not to like with the lowest (best) corporate governance risk score of 1 and in business since 1837. although not a Dividend Aristocrat it has raised the yield 11 times since 2004, again in March for an 11% increase.
Warren has already made 15% on Deere and reaped part of that 2.40% yield at an 11.19 P/E ttm. Just like Archer Daniels Midland Company (NYSE:ADM) it’s all about emerging markets clamoring for an agriculture infrastructure like ours. Deere & Company (NYSE:DE) is making its biggest bet in Brazil as it moves into the South America space with two new factories to be completed and online sometime in 2014.
Deere competes favorably against rival Caterpillar Inc. (NYSE:CAT) with its P/E at 11.36 ttm and a 2.50% yield. Quarterly earnings growth has been better at Deere, however at .10% versus -.17% for Caterpillar. In its favor, the PEG at .86 makes Caterpillar an undervalued name.
Although Caterpillar is the kind of respected American business Warren likes, its greater exposure to a volatile China takes it out of a more favored position than Deere & Company (NYSE:DE), despite a promising housing resurgence. Two other publicly traded stocks compete with Deere: Kubota Corp (ADR) (NYSE:KUB) and CNH Global NV (ADR) (NYSE:CNH).
When Deere reported in February it noted that agriculture and turf sales were up 16% while construction and forestry sales were down 7%. With Warren’s prescience he knew it was better to be less exposed to construction than with Caterpillar Inc. (NYSE:CAT) and have some agriculture exposure.
Despite the much lamented death of American family farms or is it dearth; Deere & Company (NYSE:DE) has managed to keep custom in the US with a financing arm, John Deere Capital Company, which grew revenues by almost $12 million for full year 2012 and by selling turf equipment, like those riding mowers so popular in the exurbs and equipment for golf courses.
Warren may not focus on socially responsible investing but he appreciates a company with a good reputation. Deere has made the Ethisphere Institute’s “World’s Most Ethical Companies” list for the seventh straight time and the Fortune 50 Most Admired Companies list.
We heart u 2, Warren!
Warren has given us a small indication, less than 1% of the portfolio, that agriculture is at the beginning of a bull market. Both Archer Daniels Midland Company (NYSE:ADM) and Deere & Company (NYSE:DE) fit very much in the Buffett mold: consistently growing dividends, solid longstanding businesses with growing demand, understandable business models, and American headquartered but global in nature.
Most importantly for Warren, he picked both up after a record drought when things looked their darkest. Just as Warren has finally tweeted his way into the 21st century these 19th century companies are already here.
The article Warren Is In The House originally appeared on Fool.com and is written by AnnaLisa Kraft.
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