Nothing runs like a Deere (DE). Well, perhaps with the exception of John Deere's recent stock price - year-to-date the ownership claims are trading about 5% lower. However, here at F.A.S.T. Graphs™ we find it essential to underscore the difference between temporary price movements and the merits of the underlying business. In other words, Deere's share price could be down 20%, flat, or up 30% and it wouldn't change how we looked at the business. Granted, such volatility would likely influence investing decisions, but it's paramount to understand the idea that a stock is a fundamental partnership.

In this context, we felt that it might be interesting to take a look at the 175-year-old agricultural, construction, equipment solutions and parts company. Interestingly, John Deere's investor relations' site provides an immediate thesis for growth with its "Why invest?" section. Specifically, it indicates the following:

"Macro-economic tailwinds are at our backs. By 2050, the world's population is expected to expand to 9 billion people. We're at more than 7 billion today. That growth will come mostly from emerging economies, such as China and India, where incomes are increasing, and diets improving. An increased demand for food, fuel, and fiber will require an approximate doubling of agricultural output in that timeframe."

"Also expected to continue is the migration from rural areas to cities. In 2010, for the first time in history, over 50% of the world's population lived in cities. By 2050 that number is expected to reach 70%. A smaller labor pool in rural areas creates the need for more mechanized farming, as manual labor is replaced by more productive equipment solutions. Increasing urban populations also creates the need for housing, roads, bridges, and other infrastructure investments."

Almost instantly one can observe a compelling story: the world's going to need more food, which will be produced by fewer people and Deere has a solution for the upcoming problem. Although it certainly would be fair to say that this isn't exactly a short-term or even intermediate-term type of story. One would have to fast-forward a few decades to see if this thesis came through. Yet at the very least it's important to highlight the idea that there is a long-term trend in place. You can argue about what will happen with next year's harvest or disagree about the 5-year growth rate - but I think it would be relatively difficult to make the case that the world will become less innovative in the long-term.

And of course just because a long-term thesis exists, this doesn't mean that a certain company automatically has the rights to the future spoils. Competition is always a worry. With that being said, John Deere likes its position:

"[We are] uniquely positioned to capitalize on these economic tailwinds. And, just as important, we're in a position to make a difference in the world by supporting a higher quality of life."

Your job, as a potential investor, is to determine whether or not you believe the long-term growth thesis and what part of that future growth Deere might be able to garner. Today, the John Deere name earns quite a bit of respect, not to mention over half of the North American farm equipment market.

Of course, many short-term risks remain. For instance, Morning Star analyst Adam Fleck indicates:

"We remain cautious about Deere's potential sales environment in 2014. We've previously discussed our concerns regarding farmers' monetary prospects, particularly in North America, given rising supplies of corn, soybeans, and wheat coupled with slowing demand, and Deere's initial forecast for 2014 cash receipts buoys our thinking."

Aside from cash-strapped farmers, other concerns might include: poor weather, slower than expected construction revenues, failing to implement the overseas investment strategies, maintaining strong customer loyalty and natural cyclicality. In other words, there's always a reason that a particular company or security is risky at any given time. Instead of discounting this, we encourage you to place opposing viewpoints at the helm of your due diligence. With that being said, let's take a look at the company's recent history and future prospects.

Last 9 Years of Growth

Deere & Co has grown earnings (orange line) at a compound rate of 13.7% since 2005, resulting in a $31.5+ billion dollar market cap. In addition, Deere's earnings have risen from $2.98 per share in 2005, to today's forecasted earnings per share of approximately $8.85 for 2013. Further, John Deere has been paying a dividend (pink line) for decades on end and has been able to increase this payout at a robust pace over the last decade.

For a look at how the market has historically valued Deere, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.

Here we see that Deere's market price previously began to deviate from its justified earnings growth; starting to become overvalued in 2007 and coming back to fair value during the most recent recession. Today, Deere & Co appears undervalued in relation to both its historical earnings and relative valuation.

In tandem with the strong earnings growth, Deere shareholders have enjoyed a compound annual return of 11.1% which correlates closely with the 13.7% growth rate in earnings per share. A hypothetical $10,000 investment in Deere & Co on 12/31/2004 would have grown to a total value of $25,179.05, without reinvesting dividends. Said differently, John Deere shareholders have enjoyed total returns that were roughly 1.6 times the value that would have been achieved by investing in the S&P 500 over the same time period. It's also interesting to note that an investor would have received approximately 2 times the amount of dividend income as the index as well.

But of course - as the saying goes - past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead, an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.

In the opening paragraphs a variety of catalysts, opportunities and risks were described. It follows that the probabilities of these outcomes should be the guide for one's investment focus. Yet it is still useful to determine whether or not your predictions seem reasonable.

Twenty-four leading analysts reporting to Standard & Poor's Capital IQ come to a consensus 5-year annual estimated return growth rate for Deere of 8.5%. In addition, DE is currently trading at a P/E of 9.4. If the earnings materialize as forecast, Deere & Co's valuation would be $168.95 at the end of the 2018 fiscal year, which would be a 17.1% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.

Now, it's paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs' subscriber is also able to change these estimates to fit their own thesis or scenario analysis.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in Deere to an equal investment in a 10-year treasury bond, illustrates that Deere's expected earnings would be 5.1 times that of the 10-year T-Bond Interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.

Finally, it's important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that - in the long-run - the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: "in what should I invest?" and "at what time?" In viewing the past history and future prospects of Deere & Co we have learned that it appears to be a strong company with short-term uncertainties and a reasonable long-term opportunity. However, as always, we recommend that the reader conduct his or her own thorough due diligence.

Disclosure: Long DE at the time of writing.