In this sneak peek from Action Alerts PLUS, portfolio manager Chris Versace gave his case for why Deere (DE) stands to benefit more from infrastructure spending than its fellow industrial Caterpillar (CAT).
FULL VIDEO TRANSCRIPT BELOW:
JD DURKIN: Why does the club prefer Deere over Caterpillar?
CHRIS VERSACE: So this is a great question. It really speaks to knowing what you own-- in other words, what's the differences between the two businesses? So Deere is predominantly an AG equipment company. Caterpillar, largely construction equipment. And yes, Deere does have some construction equipment, exposure around 20% are sales-- 20% or so of its revenue stream.
However, if we wanted to play Deere for the infrastructure spending that we see ramping, particularly nonresidential construction, we would be making a mistake because it has modest exposure. So the logical question that I suspect we'll get is, well, Chris, why aren't we playing Caterpillar for this? And the answer to that is very simple.
The infrastructure spending we're trying to capture is predominantly US based. When we look at Caterpillar's revenue stream, only about half of its revenue is derived from the US. So that, in our opinion, makes the largely domestic exposure with United Rentals, Vulcan Materials, a far more meaningful play on that infrastructure spending.
JD DURKIN: Chris, for those who may have missed the alert, can you dive a bit deeper into why you added to Deere on Monday? What should people know?
CHRIS VERSACE: So the company reported a simply stellar quarter. They gave great guidance on an annual basis. The wrinkle that we talked about post-earnings was the fact that, look, we're starting to see normal seasonality emerge in the AG equipment business. We've seen this start to unfold in other businesses as well as supply chains have started to ease.
It's candidly not that surprising, and I think the market really had to wrap its head around that. When we look into the innards of the report in the guidance, are backlog levels still strong? Yes. Is pricing still prevalent? Yes. Are we poised for more margin expansion? Yes. So when the shares sold off, we opted to do what we do when we see a great opportunity, and that's pick up more shares.
