Machinery Stocks

Deere & Co Valuation – March 2018 $DE

Company Profile (obtained from Marketwatch): Deere & Co. manufactures and distributes a complete line of equipment used in agriculture, construction, forestry and turf care. It also manufactures engines and other power train components. It operates its business through the following segments: Agriculture and Turf, Construction and Forestry, and Financial Services. The Agriculture and Turf segment primarily manufactures and distributes a full line of agriculture, turf equipment and related service parts, including large, medium and utility tractors; loaders; combines, corn pickers, cotton, sugarcane harvesters and related front-end equipment, sugarcane loaders; tillage, seeding and application equipment, including sprayers, nutrient management and soil preparation machinery; hay and forage equipment, including self-propelled forage harvesters and attachments, balers and mowers; turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment, along with a broad line of associated implements; integrated agricultural management systems technology; precision agricultural irrigation equipment, supplies; landscape, nursery products and other outdoor power products. The Construction and Forestry segment primarily manufactures and distributes machines and service parts used in construction, earthmoving, material handling and timber harvesting, including backhoe loaders; crawler dozers and loaders; four-wheel-drive loaders; excavators; motor graders; articulated dump trucks; landscape loaders; skid-steer loaders; and log skidders, feller bunchers, log loaders, log forwarders, log harvesters and related attachments. The Financial Services segment primarily finances sales and leases by dealers of new and used agriculture and turf equipment and construction & forestry equipment. This segment also 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. The company was founded by John Deere in 1837 and is headquartered in Moline, IL.

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DE data by YCharts

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of DE – March 2018

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 $51,591,835,133 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.98 Fail
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 56.44% Pass
6. Moderate PEmg Ratio PEmg < 20 22.61 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 5.57 Fail
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 1.98 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.19 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 Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $7.06
MG Growth Estimate -1.77%
MG Value $35.05
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $102.34
MG Value based on 0% Growth $59.99
Market Implied Growth Rate 7.06%
Current Price $159.60
% of Intrinsic Value 455.41%

Deere & Company does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $8 in 2014 to an estimated $7.06 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 7.06% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Deere & Company revealed the company was trading above its Graham Number of $77.16. The company pays a dividend of $2.4 per share, for a yield of 1.5% Its PEmg (price over earnings per share – ModernGraham) was 22.61, which was below the industry average of 29.29, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-37.95.

Deere & Company scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$37.95
Graham Number $77.16
PEmg 22.61
Current Ratio 1.98
PB Ratio 5.57
Current Dividend $2.40
Dividend Yield 1.50%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 1/1/2018
Total Current Assets $45,075,100,000
Total Current Liabilities $22,779,500,000
Long-Term Debt $26,421,800,000
Total Assets $66,577,500,000
Intangible Assets $4,771,300,000
Total Liabilities $57,324,900,000
Shares Outstanding (Diluted Average) 322,800,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $8.91
Oct2017 $6.68
Oct2016 $4.81
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $7.06
Oct2017 $6.42
Oct2016 $6.59
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

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

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Disclaimer:

The author held a long position in 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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