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.  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 specific look at how Deere & Co. fares in the ModernGraham valuation model.
Company 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 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. In December 2013, the Company sold a majority interest in its landscapes business to the private equity investment firm of Clayton, Dubilier & Rice, LLC.
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
Key Data:
| Recent Price | $87.20 |
| MG Value | $293.52 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $110.55 |
| Value Based on 0% Growth | $64.80 |
| Market Implied Growth Rate | 1.47% |
| Net Current Asset Value (NCAV) | -$1.03 |
| PEmg | 11.44 |
| Current Ratio | 2.39 |
| PB Ratio | 4.56 |
Balance Sheet – 1/31/2014
| Current Assets | $46,850,400,000 |
| Current Liabilities | $19,567,200,000 |
| Total Debt | $22,265,200,000 |
| Total Assets | $57,659,200,000 |
| Intangible Assets | $909,200,000 |
| Total Liabilities | $47,403,500,000 |
| Outstanding Shares | 536,430,000 |
Earnings Per Share
| 2014 (estimate) | $7.50 |
| 2013 | $9.09 |
| 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 |
Earnings Per Share – ModernGraham
| 2014 (estimate) | $7.62 |
| 2013 | $7.11 |
| 2012 | $5.77 |
| 2011 | $4.68 |
| 2010 | $3.68 |
| 2009 | $3.35 |
Dividend History
DE Dividend data by YCharts
Conclusion:
Deere & Co. is an excellent company that is suitable for either the Defensive Investor or the Enterprising Investor. Â The only requirement for either investor type that the company does not meet is the PB ratio. Â As a result, value investors following a ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company as well as other opportunities, such as through a review of ModernGraham’s valuation of Caterpillar Inc. (CAT) or 5 Undervalued Companies for the Defensive Investor. Â From a valuation perspective, the company appears to be significantly undervalued, having grown its EPSmg (normalized earnings) from $3.68 in 2010 to an estimated $7.62 for 2014. Â This demonstrated level of growth more than supports the market’s current implied estimate of 1.47% earnings growth, leading the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market 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 & Co. (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.
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: Â The author held a position in Deere & Co. (DE) but none of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.
Leave a Reply