Company of the Week Feature

Company of the Week: Deere & Company (DE)

image (12)The ModernGraham approach to investing has multiple layers to it.  Regular readers will be familiar with the first two steps; the first is to determine if the company is suitable for the Defensive Investor or the Enterprising Investor, and the second is to compare the price to the intrinsic value through quantitative analysis.  The next step in the analysis is to review the company’s management and other qualitative factors to determine how the company may compare to other companies that pass the first two steps.  In this Company of the Week series, we will delve into more detail about a specific company that performed well in the first two areas.  This week, the company chosen, Deere & Company, is one of the most undervalued out of all 250+ companies in the ModernGraham database and was recently featured as one of April’s 5 Undervalued Companies for the Defensive Investor.

Results of Recent Valuation

Feel free to review ModernGraham’s latest valuation of Deere & Company in detail, or read this summary:

Deere & Co. is an excellent company that is suitable for either the Defensive Investor or the Enterprising Investor.  The only requirement for either investor type that the company does not meet is the PB ratio.  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).  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.  This demonstrated level of growth more than supports the market’s current implied estimate of 1.86% earnings growth, leading the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

Further Analysis

Price trend compared to the market

In the following chart, it is clear that over the last five years Deere & Company has outperformed the market, but in the second chart it is clear this trend has not been true in the last year.  While Intelligent Investors will know that price trends are not determinative of value or opportunity, they can be helpful in comparing Mr. Market’s behavior toward the company with the valuation.  It is easy to see that Mr. Market does not view the company quite as favorably as he did a few years ago.  Now, despite the company outperforming the market over the last five years, it does appear to still have upside, as explained in the summary above.

DE Chart

DE data by YCharts

DE Chart

DE data by YCharts

Earnings Per Share

The next chart shows Deere & Company’s earnings over the last 30 years.  Two things stand out:  (1)  the company’s earnings have been strongly rising despite a couple of bumps in the road, and (2) the earnings have skyrocketed in the last few years.  This is illustrated also by the rise in EPSmg (normalized earnings) from $3.35 in 2009 to an estimated $7.62 for 2014.  One would definitely like to see this trend continue, but it probably isn’t realistic to expect it to happen long-term, given the fact the growth rate in that time period is over 20% per year.  However, according to the ModernGraham valuation model, the market is only implying a growth rate of 1.86% based on today’s price.  So growth could slow considerably and still be better than the market is expecting.

DE EPS Diluted (TTM) Chart

DE EPS Diluted (TTM) data by YCharts

Dividend Rate & Yield

Dividends are a very important part of any analysis into a company, as they not only indicate management’s willingness to return value to shareholders, but they also indicate an opportunity for the Intelligent Investor to gain a return on the investment outside of capital appreciation.  In the next chart, we see that Deere & Company’s dividend has increased very significantly in the last ten years, and the company still demonstrates a very strong dividend yield of 2.19%.

DE Dividend Chart

DE Dividend data by YCharts

Price to Book

This final chart demonstrates the potential value by showing the company’s price to book ratio over the last 10 years.  As you can see, the company is trading at a low Price to Book ratio when compared to the last five years.  In addition, the only times in the last 10 years the price to book was lower was during the great recession and during a brief period from 2005-2007.  This alone is not a strong indicator of value, but used in conjunction with intrinsic value estimates and detailed analysis, it can help show again that the market may be undervaluing the company.  At the very least, the market is not treating it the way it did in the past.
DE Price to Book Value Chart

DE Price to Book Value data by YCharts

ModernGraham Conclusion

To me, Deere & Company appears to be a very intriguing opportunity for value investors.  The company qualifies for both Defensive Investors and Enterprising Investors, and the quantitative analysis using one of Benjamin Graham’s formulas indicates the company is significantly undervalued. I think there are much fewer concerns about this company than many others.  I also believe that given the rise in the earnings, the strong dividend yield, and the low PB ratio, it may only be a matter of time before Mr. Market brings the price up.  The company passes the initial tests with flying colors, and I’d be very interested to hear readers views regarding any qualitative analysis regarding the company through comments on this post.

Management Tenets

Warren Buffett has promoted looking at some key management tenets, and I’d like to leave it up to readers to discuss how Intel fulfills (or fails to fulfill) these qualities.  Please discuss the following in the comments below:

  1. Is the business simple and understandable?
  2. Does the business have a consistent operating history?
  3. Does the company have favorable long-term prospects?
  4. Is management rational?
  5. Is management candid with shareholders?

Disclosure:  The author held a long position in Deere & Company (DE) but no other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

6 thoughts on “Company of the Week: Deere & Company (DE)

  1. Ben,

    I’m a big fan of your website and the investing insights it provides. But this is a very perplexing analysis. Deere & Co. has a total debt-to-equity ratio of 3.36 which is way out of my comfort level. How can you say this company is so undervalued when it has so much debt?

    1. Matt,

      Thanks for the comment! The analysis looks at the debt when considering whether the company qualifies for the Defensive Investor or the Enterprising Investor, which is part of the most recent valuation. The primary metrics revolve around the current ratio and the debt to net current assets. In this case, Deere’s current ratio is 2.39, which passes the requirement for both investor types. In addition, the total long-term debt is less than 1.1 times the net current assets, which passes another of the Enterprising Investor’s requirements. The debt to equity ratio isn’t a huge concern because the company has no apparent liquidity issues.

  2. I am a Canadian, living in rural Ontario. Up here, most farmers buy Deere tractors and farm equipment; they have a good name. Yet, I am told that lately Deere uses foreign, mostly Chinese-made, parts, engines, etc. USA-made guts are rare! Is this true?
    Seeing the incipient recovery of manufacturing, especially in the USA (and Mexico), where is Deere going in the years ahead?
    I would be much happier buying DE if I felt they supported our North-American Free Trade Area manufacturing industry. One of my neighbors, who owns a beautiful (older) John Deere tractor, says he sold all his DE stock last year because it wasn’t going anywhere!! He seems typical of many who love the older quality of “original” Peoria, Illinois-made John Deeres, but are now having doubts. They seem to be holding back serious long term investors, like me, by damning DE management with faint praise.

  3. Hi Ronald,

    I did some research on Deere and it appears that they do still have a strong US manufacturing presence particularly in both Illinois and Iowa. They do, however, have a very strong world presence as well. From what I’ve read it seems that in the 1980s they moved production of products sold within Europe to Germany. I believe this is fairly on par with many other companies that have found it more effective to produce items where they are sold.

    These two pdfs are great sources for understanding exactly what they do and where. It does appear that many of the “guts” are made overseas, but honestly I don’t understand enough of terminology used to describe tractors to know exactly how much or what parts.

    http://www.deere.com/common/docs/our_company/about_us/worldwide_locations/worldwidelocations.pdf
    http://www.deere.com/common/docs/our_company/about_us/worldwide_locations/uslocations.pdf

    Please let me know if you are able to find any other good resources about Deere and their production.
    Thanks for your comment!
    Heather

    1. I’ve just recently begun following your website and have enjoyed the daily updates quite a bit. I read Intelligent Investor last year and was very impressed with the book, as I am with your site. I aim to keep following to learn more.

      I took a look at the financial statements of Deere (10K for YE 10/31/13). I can see why it passed MG testing so well. One thing that surprised me, however, was the significant annual impact of changes in Deere’s post-retirement obligations. They maintain defined benefit plans. In 2013 they reported a gain of almost $2 billion related to asset and actuarial changes in the plan. The previous 2 years had similar adjustments that resulted in major losses. It can be found in the Statement of Comprehensive Income, with details in the notes. I’m curious what would happen to the EPSmg calculation if the Comprehensive Income numbers were used? It appears that the items reported in Comprehensive (pension obligations, currency translation) are rather significant to Deere. Is there a Graham approach to analyzing Comprehensive Income?

      1. Gabe,

        Thanks for the comment! I’m glad you’re enjoying the site.

        FASB did not start requiring statements of comprehensive income until 1997, well after Graham’s day, so there is nothing from him regarding the concept. However, it is certainly one way intelligent investors can dive into more detail when conducting further research into any company.

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