Machinery Stocks

Deere & Company Valuation – June 2016 $DE

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 Companies Benjamin Graham Would Invest In Today – June 2016.  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 is engaged in equipment operations and financial services. The Company operates through three business segments: agriculture and turf, construction and forestry, and financial services. The Company’s agriculture and turf segment primarily manufactures and distributes a full line of agriculture and turf equipment and related service parts. The Company’s construction and forestry segment primarily manufactures and distributes a range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. The Company’s financial services segment primarily provides credit services, which include finance sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of DE – June 2016

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 $25,781,836,567 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.10 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 68.68% Pass
6. Moderate PEmg Ratio PEmg < 20 13.10 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.61 Pass
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 2.10 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.10 Fail
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 June 2016

EPSmg $6.24
MG Growth Estimate 1.21%
MG Value $68.11
Opinion Overvalued
MG Grade B-
MG Value based on 3% Growth $90.41
MG Value based on 0% Growth $53.00
Market Implied Growth Rate 2.30%
Current Price $81.68
% of Intrinsic Value 119.92%

Deere & Company qualifies for both the Defensive Investor and the Enterprising Investor. In fact, the company meets all of the requirements of both investor types, a rare accomplishment indicative of the company’s strong financial position. . The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $5.77 in 2012 to an estimated $6.24 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 2.3% 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 below the price.

Deere & Company performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

DE Charts June 2016

Net Current Asset Value (NCAV) -$29.52
Graham Number $43.86
PEmg 13.10
Current Ratio 2.10
PB Ratio 3.61
Current Dividend $2.40
Dividend Yield 2.94%
Number of Consecutive Years of Dividend Growth 13

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Most Recent Balance Sheet Figures

Balance Sheet Information 4/1/2016
Total Current Assets $42,676,100,000
Total Current Liabilities $20,308,100,000
Long-Term Debt $24,648,000,000
Total Assets $59,183,300,000
Intangible Assets $955,500,000
Total Liabilities $52,019,000,000
Shares Outstanding (Diluted Average) 316,500,000

Earnings Per Share History

Next Fiscal Year Estimate $3.75
Oct2015 $5.77
Oct2014 $8.63
Oct2013 $9.09
Oct2012 $7.63
Oct2011 $6.63
Oct2010 $4.35
Oct2009 $2.06
Oct2008 $4.70
Oct2007 $4.00
Oct2006 $3.59
Oct2005 $2.94
Oct2004 $2.78
Oct2003 $1.32
Oct2002 $0.67
Oct2001 -$0.14
Oct2000 $1.03
Oct1999 $0.51
Oct1998 $2.08
Oct1997 $1.89
Oct1996 $1.57

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.24
Oct2015 $7.50
Oct2014 $8.00
Oct2013 $7.11
Oct2012 $5.77
Oct2011 $4.68
Oct2010 $3.71
Oct2009 $3.41
Oct2008 $3.93
Oct2007 $3.34
Oct2006 $2.76
Oct2005 $2.06
Oct2004 $1.46
Oct2003 $0.76
Oct2002 $0.60
Oct2001 $0.74
Oct2000 $1.25

Recommended Reading:

Other ModernGraham posts about the company

Deere & Company Valuation – January 2016 Update $DE
10 Undervalued Companies for the Defensive Dividend Stock Investor – December 2015
10 Low PE Stocks for the Defensive Investor – December 2015
10 Most Undervalued Companies for the Defensive Investor – November 2015
10 Undervalued Companies for the Defensive Dividend Stock Investor – November 2015

Other ModernGraham posts about related companies

A.O.Smith Corporation Valuation – June 2016 $AOS
Ingersoll-Rand PLC Valuation – May 2016 $IR
Snap-on Inc Valuation – February 2016 $SNA
AGCO Corporation Valuation – February 2016 $AGCO
Joy Global Inc Valuation – February 2016 $JOY
Allegion PLC Valuation – February 2016 Update $ALLE
Rockwell Automation Inc Valuation – February 2016 Update $ROK
Parker Hannifin Corp Valuation – January 2016 Update $PH
Stanley Black & Decker Inc Valuation – January 2016 Update $SWK
Paccar Inc Valuation – January 2016 Update $PCAR

Disclaimer:

The author held a long position in Deere & Co (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.  See my current holdings here.  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 be sure to review our detailed disclaimer.

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