ModernGraham Valuation: Deere & Co. (DE)

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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