ModernGraham Valuation: Deere & Co. (DE)

moneyCompany Profile (obtained from Google Finance): Deere & Company (John Deere) along with its subsidiaries, operates in three segments: agriculture and turf, construction and forestry and financial services. The John Deere agriculture and turf segment manufactures and distributes a line of agricultural and turf equipment and related service parts. John Deere construction, earthmoving, material handling and forestry equipment includes a broad range of backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, log skidders, log feller bunchers, log loaders, log forwarders, log harvesters and a range of attachments. The financial services segment primarily finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $264.16
MG Opinion Undervalued
Value Based on 3% Growth $99.49
Value Based on 0% Growth $58.32
Market Implied Growth Rate 2.10%
Net Current Asset Value (NCAV) -$4.72
PEmg 12.71
Current Ratio 2.32
PB Ratio 5.44

Balance Sheet – 7/31/2013 

Current Assets $47,213,500,000
Current Liabilities $20,379,900,000
Total Debt $21,698,700,000
Total Assets $58,336,900,000
Intangible Assets $1,005,200,000
Total Liabilities $49,747,100,000
Outstanding Shares 536,430,000

Earnings Per Share

2013 (estimate) $8.35
2012 $7.63
2011 $6.63
2010 $4.35
2009 $2.06
2008 $4.70
2007 $4.00
2006 $3.08
2005 $2.94
2004 $2.78
2003 $1.32

Earnings Per Share – Modern Graham 

2013 (estimate) $6.86
2012 $5.77
2011 $4.68
2010 $3.68
2009 $3.35
2008 $3.83

Conclusion:

Deere & Co. is a strong company and passes the requirements for both the Defensive Investor and the Enterprising Investor.  The only knocks on the company in that regard is that the PB ratio is a little high, but that is not enough to eliminate the company from further review by either investor type.  The ModernGraham valuation model also views Deere & Co. favorably, as a result of the strong growth the company has demonstrated over the historical period.  The company’s EPSmg (normalized earnings) have grown from $3.83 in 2008 to an estimated $6.86 for 2013.  This level of growth surpasses the market’s implied growth rate of only 2.1%, and as a result it would appear the company is undervalued at this time.  Defensive Investors and Enterprising Investors should take a look at our review of Caterpillar Inc. (ModernGraham Valuation) as they do further research to determine whether Deere & Co. would be suitable for their individual portfolios.

What do you think?  Do you agree that Deere & Co. is undervalued?  Is the company suitable for both Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Deere & Co. (DE) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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