Given the S&P 500is down 20% this year, and it’s safe to say there are some opportunities to pick up stocks with good long-term growth prospects. One of her good ways to find such stocks is by looking at a well-known investor, in this case Kathy Wood, and her ARK Invest her ETF. Wood invests in many small tech stocks, deer (DE -2.73%) When caterpillar (Cat -2.70%) slightly different. It’s a heavyweight industry that uses technology to improve its products. Additionally, these changes bring tangible improvements to fundamentals and operational metrics. Here’s how and why.
Deere and Caterpillar are ARK Autonomous Technology & Robotics ETFDeere was chosen because it employs smart farming, or precision farming technology. This effort makes smart farming an integral part of Deere’s farming business.
Crop cultivation is an industry traditionally characterized by decision-making under uncertainty. For example, when should farmers prepare soil and what should they prepare? What crops should I plant and how best to grow them? When to harvest? How can you get the farm equipment you need at a critical time? All of these issues impact yields and ultimately farmer incomes.
The good news is that Deere’s Precision AG technology can help. AutoTrac provides automatic guidance to your tractor so you can be more productive. AutoPath, on the other hand, uses data collected from planting to more accurately spread and harvest crops. Deere’s Connected Support helps farmers get remote support for equipment maintenance. Harvest Profit provides software tools that help farmers increase profitability on a field-by-field basis. ExactRate and ExactApply make fertilizer application more precise, and See & Spray uses camera technology to apply herbicide only to target weeds. ExactEmerge improves planting accuracy and precision. Meanwhile, Deere continues to invest heavily in developing autonomous tractors.
The benefits of Deere’s 20-year investment in technology are reflected in its stock price performance. His $10,000 investment in Deere twenty years ago is now worth $170,000. It also helps improve customer loyalty and increase aftermarket revenue, and software solutions add value to your equipment. For example, management recently stated that they are currently at 65% usage of ExactApply in sprayers and 60% usage of ExactEmerge in planters. Both clearly demonstrate that differentiated precision AG solutions enhance the appeal of the overall product.
In addition, it enhances Deere’s earnings quality, giving it an edge over its competitors. As such, Deere deserves to be in the portfolio of investors excited about self-driving technology.
There is no way to hide that Caterpillar is a highly cyclical company. For example, a downturn in the construction market would hurt sales of Caterpillar’s construction equipment. Similarly, when mining commodities (such as iron ore and copper) fall, resource customers invest less in mining equipment. The same is true for the sale of Caterpillar oil and gas equipment.
As such, Caterpillar’s sales and earnings are subject to constant volatility, which is driven by ultimate market conditions.
However, management is trying to reduce revenue volatility by increasing service revenue. In fact, the company’s goal is to double its services revenue from $14 billion in 2016 to $28 billion in 2026. Service revenue tends to hold up stronger amid slowdowns as equipment users tend to hold back on new equipment purchases, but that is not possible. To avoid repairing equipment while it is in use. Similarly, the longer you run older equipment, the more likely it is to need servicing.
A large part of Caterpillar’s efforts to increase service sales is due to investments in digital technology. For example, using advanced telematics and machine learning, Caterpillar can monitor equipment health to ensure proper and timely service. In addition, Caterpillar’s online platform helps the customer better source and order replacement parts from his Caterpillar dealer.
As a result, Caterpillar’s earnings and cash flows are becoming less cyclical. As a result, management expects free cash flow over the cycle to fluctuate between his $4 billion and his $8 billion. The lower end of that range is well above his current dividend payout of $2.4 billion. This means Caterpillar can continue to increase its dividend even if the economy slows further in 2023 (currently yielding 2.8%).
stocks to buy
Wood is known for investing in smaller companies with disruptive technologies, but these are all large companies that use disruptive technologies to improve their products and gain market share. In doing so, Deere and Caterpillar are improving underlying profitability and growth prospects.
Lee Samaha has no positions in any of the mentioned stocks. The Motley Fool recommends Deere & Co. The Motley Fool’s U.S. headquarters has a disclosure policy.