Bill Gates Just Bought $571 Million of This Stock

Anytime Bill Gates snaps up a stock like there's no tomorrow, investors should pay attention. Gates, since retiring from full-time duties as co-founder and chairman of Microsoft Corp. (Nasdaq: MSFT), has devoted most of his time to running the Bill and Melinda Gates Foundation, which supports worthy causes and innovations around the world. But Gates has also been actively at work selling his massive stake in Microsoft and diversifying into other stocks through his investment firm, Cascade Investment, LLC. Couple this with the fact that he's often known to take a hint or two from his fellow-billionaire buddy Warren Buffett, and you have ample reason to keep tabs on his stock purchases.

Recently, Gates made a series of purchases of a stock I'm sure you've heard of -- Deere & Co. (NYSE: DE), the world's largest farm equipment manufacturer, a leader in the production of equipment and machinery for the construction and forestry industries, and a top producer of lawn and garden tractors for homeowners. Gates has made purchases of about 7.5 million shares worth about $571 million.

After I examined the stock's fundamentals, it was easy to see why Gates would want to load up on the shares.

It's a good value, trading at less than 13 times trailing 12-month earnings compared with the industry average price-to-earnings (P/E) ratio of 14.5. The stock's P/E ratio is also well below the five-year average of 18.4. Its forward P/E ratio of 11 is also very reasonable.

What's more, Deere & Co. has a firm balance sheet, showing total shareholder equity of $7.5 billion, a level not seen since 2006. The company's debt load appears manageable, judging by the ratio of liquid assets to short-term debt. At 2.0, this ratio, commonly known as the current ratio, indicates enough liquid assets to pay off near-term obligations twice over. Cash flow has been sufficient for management to regularly approve increases in the quarterly dividend, the most recent being a 17% hike in June. After throwing off $0.35 a share for the prior two quarters, the stock now pays $0.41 per share for a yield of about 2%. The dividend has been raised an average of 16% every year for the past five years, and analysts forecast increases of 31% in 2011 and 14.5% 2012.

Deere & Co. typically owns a large share of the markets it which it competes, such as its nearly 50% share of the North American farm equipment market. The company dominates domestically because its products are known for their high quality and strong customer service, and they typically command a high resale value. This solid reputation has also facilitated overseas expansion. Deere & Co. now derives 42% of total sales (currently $29.1 billion annually) from Europe, Mexico and other foreign sources, up from 28% in 2005. Because the company is more geographically diversified than competitors, it tends to enjoy greater profitability when business is good and take smaller hits to the bottom line during industry downturns.

For the next five years, analysts estimate revenue will rise at a solid 8.5% pace overall, but expect foreign sales to grow twice as fast as domestic sales -- an increasingly common theme as the developing world continues to blossom. Emerging markets with large populations such as China and India should account for most of the foreign sales growth. As these countries have advanced economically, their demand for food has risen both in terms of quantity and quality. So Deere & Co. plans to ramp-up sales of farm equipment in these countries in response to the increased demand.

Construction equipment should also sell briskly in developing countries, particularly China, the world's largest and fastest-growing market for construction equipment. On Dec. 15, 2010, Deere & Co. announced one of its latest initiatives to capitalize on this -- a $50 million construction equipment factory in northern China. The factory is slated to begin operations in the summer of 2012.

Risks to consider: Deere & Co. has considerable exposure to the ailing U.S. housing market through its construction equipment business, where sales could suffer if the housing market were to worsen significantly. Also, further expansion into foreign markets could be difficult. In India, for instance, it could be years before Deere & Co. can establish an adequate market for its more profitable large tractors (those with more than 50 horsepower). Instead, it may end up having to settle for selling much less profitable smaller machines.

Action to Take --> I'm with Bill Gates, despite the risks Deere & Co. faces.  Because of its size, financial strength and geographic diversity, the company is capable of shrugging off any of the adverse possibilities I've described and generating the profits necessary to propel its stock 35% to 75% higher in the next three to five years, as analysts predict. I strongly suggest you consider adding the stock to your portfolio.

-- Tim Begany

*Originally published on StreetAuthority. Re-published with permission.

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