The world's richest man, Bill Gates, has been a pioneer when it comes to investing in boring industries. These investments are 'steady as she goes' when it comes to being big plays on the broader economy.
Gates' favorite picks in this space include two of the world's largest equipment makers. My colleague David Sterman highlighted Gates' love for Caterpillar (NYSE: CAT) earlier this year, including the fact that the equipment giant is a great Total Yield play. Gates' owns 11.2 million shares (just under 2% of the company) through the Bill & Melinda Gates Foundation.
While Caterpillar is still a great stock to own, one of Gates' most underrated investments is Deere & Co. (NYSE: DE). Gates is Deere's largest shareholder, owning 8.1% of the company through his private investment fund, Cascade Investment.
Nearly 80% of Deere's revenue is derived from agricultural and turf equipment, which includes tractors, loaders and combines. Its construction equipment segment makes up less than 20% of revenues, and includes loaders, dozers and excavators. The construction business should get a boost from the economic recovery.
Meanwhile, Caterpillar is more of play on construction and mining equipment. While its exposure to China should be a long-term positive, the uncertainties in the mining market are a near-term negative. Caterpillar also faces some geopolitical risks when it comes to the likes of Russia and the Middle East. Sales for 2013 were down in Asia-Pacific, Europe, the Middle East and Africa.
When it comes to farm and agriculture equipment, Deere has a couple of key tailwinds. The most notable is the rise of the global population and rising middle class across emerging economies. As part of this, Deere is boosting its presence in fast-growing markets.
This includes Brazil and India, where Deere is increasing its manufacturing footprint. Brazil is a leader in agricultural exports, including coffee and oranges. It also has one of the largest livestock populations in the world, but mechanized farming is still in its early stages. That means there's a big opportunity for the likes of Deere.
With its strong dividends and share buybacks, Caterpillar is a great Total Yield play -- but so is Deere. Deere has reduced its shares outstanding by more than Caterpillar over the past five- and 10-year periods. Over the past five years, Deere has lowered its share count by 14%, while Caterpillar's share count has remained flat.
Yet Deere continues to underperform Caterpillar. Shares of DE are flat this year, while Caterpillar is up 24%. And over the past five years, DE has underperformed CAT by over 100 percentage points.
From a valuation perspective, Deere is the more compelling investment. Its stock trades at a price-to-earnings (P/E) ratio of 10, compared with Caterpillar's 19. Deere's P/E is also a 33% discount to its five-year average, whereas Caterpillar's is right in line with its average.
As the demand for farming and food rises, Deere could be one of the market's better performers. It offers a 2.6% dividend yield, compared with Caterpillar's 2.5%. Deere is also paying out only 22% of its earnings in the form of dividends, so there's room to increase the dividend.
Risks to Consider: Both of these major equipment makers are heavily reliant on the broader economy. If the economy continues to grow at a sluggish rate, revenue growth will remain slow. Another major risk is that Deere's key opportunity lies in emerging markets, where economic growth is more volatile.
Action to Take --> Follow Gates' lead and invest in the urbanization of emerging markets. Deere is the better-priced of the two infrastructure plays. Assuming shares trade closer to their five-year average P/E of 15 on expected fiscal 2015 earnings of $7.70 a share, the upside is to $115 -- 25% higher than current levels.