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
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – PASS
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
|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|
Balance Sheet – 7/31/2013
Earnings Per Share
Earnings Per Share – Modern Graham
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.
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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