Machinery Stocks

Deere & Company Analysis – June 2015 Update $DE

500px-John_Deere_logo.svgDeere & Company (DE) has shown very strong earnings growth over the last several years, which when combined with the company’s healthy dividend yield should immediately intrigue many investors. In fact, analysts believe the company has strong potential for the future. For example, Seeking Alpha contributors Ron Honig, Tom Armistead and Daniel Jones all believe the company has long-term potential even as it seems the company may be facing the down-side of its typical cyclical nature. On the other hand, Josh Arnold takes a much more negative view of the company due to recent earnings results. Those articles all provide great qualitative consideration that must be taken into account when making investment decisions.

However, Benjamin Graham, the father of value investing, taught that investors must take emotion out of the equation as the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits. Here’s a look at how the company fares in the ModernGraham valuation model.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

DE Chart

DE data by YCharts

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

  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 one-third over the last 10 years, using 3-year averages at the beginning and end of the period – PASS
  6. Moderate PEmg (price over normalized earnings) 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 – PASS

Enterprising Investor – Must pass at least four of the following five tests to 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

Key Data:

Recent Price $92.93
MG Value $185.14
MG Opinion Undervalued
Value Based on 3% Growth $105.88
Value Based on 0% Growth $62.07
Market Implied Growth Rate 2.11%
Net Current Asset Value (NCAV) -$8.03
PEmg 12.73
Current Ratio 2.29
PB Ratio 3.86

Balance Sheet – April 2015

Current Assets $48,692,000,000
Current Liabilities $21,231,000,000
Total Debt $23,623,000,000
Total Assets $59,594,000,000
Intangible Assets $797,000,000
Total Liabilities $51,420,000,000
Outstanding Shares 339,700,000

Earnings Per Share

2015 (estimate) $5.17
2014 $8.63
2013 $9.09
2012 $7.63
2011 $6.63
2010 $4.35
2009 $2.06
2008 $4.70
2007 $4.00
2006 $3.59
2005 $2.94

Earnings Per Share – ModernGraham

2015 (estimate) $7.30
2014 $8.00
2013 $7.11
2012 $5.77
2011 $4.68
2010 $3.71

Dividend History

DE Dividend Chart

DE Dividend data by YCharts

Competitive Comparison

Deere & Company fares very similarly to Caterpillar Inc. (NYSE:CAT), one of its main competitors. The most recent ModernGraham valuation of Caterpillarfound that company to also be significantly undervalued and suitable for Defensive Investors.

Conclusion

Deere & Company performs very well in the ModernGraham model and is suitable for both Defensive and Enterprising Investors. In fact, the company passes all of the requirements of both investor types, which is a rare accomplishment indicative of the company’s strong financial position. As a result, all value investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $4.68 in 2011 to an estimated $7.30 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 2.11% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 11.25% annually, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.

Value investors should take this information regarding the company’s valuation and proceed with further research into whether the company would be suitable for individual portfolios.

Disclaimer:  The author held a long position in Deere & Company (DE) but did not hold a position in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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