Go to ...

ModernGraham

Value Investing Research Since 2006

RSS Feed

Tuesday, January 16, 2018

My Personal Holdings: Deere & Company – October 2015 Update $DE


Personal Holdings

I am often asked if I utilize the methods I teach here on ModernGraham, and the answer is yes.  I fully believe that Benjamin Graham’s methodology can be used in the market today, especially after taking time to analyze each one of his ideas and modernize it as needed.  The ModernGraham method can be a great way to narrow down investment opportunities to the strongest companies, and then a little bit of further research can help one determine in which companies to invest.

This series of posts looks at each of my personal holdings, putting them through a full ModernGraham valuation and adding a level of further research to provide rationale as to why I selected the company for my portfolio.  Here’s a page with more information about my portfolio, including my thoughts and goals on asset allocation and an overview of my current holdings.

The first step in my analysis is to put the company through a full ModernGraham valuation.  For readers who may be new to the site, here on ModernGraham I cover the full S&P 500, putting each company through an individual valuation like this every quarter if it qualifies for either the Defensive Investor or Enterprising Investor, or every year if it does not qualify for either investor type.  Premium members have access to every valuation on the site, for only $4.99/month.

ModernGraham Valuation

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Deere & Company (DE) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Deere & Company along with its subsidiaries operates and organized in three major business segments: The agriculture and turf segment that manufactures and distributes a full line of agriculture and turf equipment and related service parts. The construction and forestry segment manufactures and distributes a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. The financial services segment finances sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment. In addition, the financial services segment provides wholesale financing to dealers of the foregoing equipment, finances retail revolving charge accounts and operating loans and offers crop risk mitigation products and extended equipment warranties. Intersegment sales and revenues represent sales of components and finance charges, which are generally based on market prices.

Downloadable PDF version of this valuation:

ModernGraham Valuation of DE – October 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $23,715,585,525 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.05 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 87.55% Pass
6. Moderate PEmg Ratio PEmg < 20 9.88 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.14 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.05 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.04 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

DE value Chart October 2015

EPSmg $7.36
MG Growth Estimate 8.60%
MG Value $189.01
Opinion Undervalued
MG Value based on 3% Growth $106.65
MG Value based on 0% Growth $62.52
Market Implied Growth Rate 0.69%
Current Price $72.64
% of Intrinsic Value 38.43%

Deere Corporation qualifies for both the Defensive Investor and the Enterprising Investor.  The company passes all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $4.68 in 2011 to an estimated $7.36 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 0.69% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Deere & Company (DE)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

DE Charts October 2015

Net Current Asset Value (NCAV) -$22.57
Graham Number $53.12
PEmg 9.88
Current Ratio 2.05
PB Ratio 3.14
Dividend Yield 3.30%
Number of Consecutive Years of Dividend Growth 12

 

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $43,668,800,000
Total Current Liabilities $21,252,800,000
Long-Term Debt $23,200,900,000
Total Assets $58,932,200,000
Intangible Assets $773,700,000
Total Liabilities $51,209,100,000
Shares Outstanding (Diluted Average) 334,100,000

Earnings Per Share History

Next Fiscal Year Estimate $5.33
Oct14 $8.63
Oct13 $9.09
Oct12 $7.63
Oct11 $6.63
Oct10 $4.35
Oct09 $2.06
Oct08 $4.70
Oct07 $4.00
Oct06 $3.59
Oct05 $2.94
Oct04 $2.78
Oct03 $1.32
Oct02 $0.67
Oct01 -$0.14
Oct00 $1.03
Oct99 $0.51
Oct98 $2.08
Oct97 $1.87
Oct96 $1.56
Oct95 $1.35

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $7.36
Oct14 $8.00
Oct13 $7.11
Oct12 $5.77
Oct11 $4.68
Oct10 $3.71
Oct09 $3.41
Oct08 $3.93
Oct07 $3.34
Oct06 $2.76
Oct05 $2.06
Oct04 $1.46
Oct03 $0.76
Oct02 $0.60
Oct01 $0.73
Oct00 $1.25
Oct99 $1.40

Recommended Reading:

Other ModernGraham posts about the company

10 Undervalued Companies for the Defensive Dividend Stock Investor – September 2015
5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – September 2015
10 Low PE Stocks for the Defensive Investor – August 2015
The Best Companies of the Machinery Industry – August 2015
The 8 Best Stocks For Value Investors This Week – 6/27/15

Other ModernGraham posts about related companies

Allegion PLC Analysis – September 2015 Update $ALLE
Parker Hannifin Corporation Analysis – September 2015 Update $PH
Roper Technologies Inc. Analysis – September 2015 Update $ROP
My Personal Holdings: Dover Corporation – September 2015 Update $DOV
Xylem Inc. Analysis – August 2015 Update $XYL
Cummins Inc. Analysis – August 2015 Update $CMI
Fastenal Company Analysis – August 2015 Update $FAST
A.O. Smith Corporation Analysis – Initial Coverage $AOS
The Best Companies of the Machinery Industry – August 2015
Danaher Corporation Analysis – August 2015 Update $DHR

Rationale & Outlook

After putting the company through a ModernGraham valuation, the next step is to look at the company to analyze its business.  I like to utilize Warren Buffett’s business tenets, which are very helpful in determining the business’s strengths and weaknesses.  Let’s put Deere & Company through that analysis:

Is the business simple and understandable?

Deere & Company’s business is very straightforward and understandable.  The company is engaged in the manufacture of machinery used for a very wide variety of purposes.  In particular, the company specializes in machinery for use in various agricultural and landscaping needs.

Buffett prefers to have companies with a simple business model because it is key for the investor to be able to know what the company is doing.  Here, the company’s core business model is extremely easy to understand even if the technical aspects of the products are a little more complicated for an individual without a mechanic’s understanding of the world.

Does the business have a consistent operating history?

Deere has been in operation since 1837, and throughout that time the company’s operations have remained consistent.  The overall strategy of the company remains to create products to make farming easier.  Remarkably, the company’s core business has remained farming machinery for over 175 years of operating history.  It certainly helps that farming is an industry that will perpetually be in existence and constantly be needing new equipment.

In addition, the company has a long history of consistent dividends and dividend growth.  In fact, Deere’s dividends have grown annually for at least the last twelve years from $0.44/share in 2003 to $2.40/share today.  Dividend growth is a key element in a long-term investing strategy, as it can provide a solid yield on investment over a large period of time.

Does the company have favorable long-term prospects?

As mentioned, Deere’s business model is focused primarily on assisting two major industries – farming and construction.  Both of these industries will perpetually be in existence; the world will always need farms to sustain a human population, and humans will always be constructing new buildings or maintaining old infrastructure.  As a result, the company has very strong long-term prospects when considering maintaining earnings.

A different discussion revolves around whether the company has favorable long-term prospects for continued growth.  The company is currently focusing on expansion into foreign markets, and expects 75% of its future growth to come from those markets.

Is management rational?

Deere’s management has a clear strategy that is focused on long-term growth.  As such, that management appears to be very rational in my opinion.  In addition, the company has strong core values which is a key concept for management to address.

Is management candid with shareholders?

Management candor is a key tenet, and the easiest way for management to be candid in today’s environment is to post informative statements on the company website, including links to earnings calls or transcripts of those calls.  Deere’s investor information page is very easy to navigate and includes all of the information one would expect to see.

General Thoughts and Outlook

My position in Deere right now has been limited in that I have not added to the position for some time.  I’ve held Deere for a few years now, and during my last valuation it was found to be undervalued.  I am a little concerned about the recent dip in earnings, but believe that if the company bounces back in the next year the normalized earnings may not take a very large hit.  I’m particularly excited to see that even though the company’s stock price has remained relative flat over the last several years, earnings and dividends have continued to rise considerably.

Disclaimer:

The author held a long position in Deere 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.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please also take a moment to read our full disclaimer.

Tags: , , , , , ,

Leave a Reply

Your email address will not be published. Required fields are marked *

More Stories From Ben's Portfolio

About Benjamin Clark