Machinery Stocks

Deere & Co Valuation – January 2019 $DE

Company Profile (excerpt from Reuters): Deere & Company, incorporated on April 25, 1958, is engaged in equipment operations. The Company is engaged in providing financial services. The Company operates through three business segments: agriculture and turf, construction and forestry, and financial services. The agriculture and turf segment manufactures and distributes a line of agriculture and turf equipment and related service parts. The construction and forestry segment provides a line of construction equipment, and forestry machines and attachments available in the world. The financial services segment primarily finances sales and leases by the Company dealers of new and used agriculture and turf equipment and construction and forestry equipment. Its products are marketed primarily through independent retail dealer networks and retail outlets. As of October 31, 2016, the Company’s operations consisted of two geographic areas: the United States and Canada, and outside the United States and Canada.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of DE – January 2019

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 $50,630,764,289 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.84 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 34.71% Pass
6. Moderate PEmg Ratio PEmg < 20 19.76 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.55 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 1.84 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.30 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

EPSmg $8.01
MG Growth Estimate 1.01%
MG Value $84.33
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $116.14
MG Value based on 0% Growth $68.08
Market Implied Growth Rate 5.63%
Current Price $158.28
% of Intrinsic Value 187.69%

Deere & Company is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, high PB ratio. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising 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 $7.5 in 2015 to an estimated $8.01 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 5.63% 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 $93.83. The company pays a dividend of $2.58 per share, for a yield of 1.6% Its PEmg (price over earnings per share – ModernGraham) was 19.76, which was below the industry average of 23.62, 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 $-39.08.

Deere & Company receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$39.08
Graham Number $93.83
PEmg 19.76
Current Ratio 1.84
PB Ratio 4.55
Current Dividend $2.58
Dividend Yield 1.63%
Number of Consecutive Years of Dividend Growth 1

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Most Recent Balance Sheet Figures

Balance Sheet Information 10/1/2018
Total Current Assets $46,132,700,000
Total Current Liabilities $25,130,300,000
Long-Term Debt $27,237,400,000
Total Assets $70,108,000,000
Intangible Assets $4,662,700,000
Total Liabilities $58,816,800,000
Shares Outstanding (Diluted Average) 324,600,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $11.15
Oct2018 $7.24
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

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $8.01
Oct2018 $6.50
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

Recommended Reading:

Other ModernGraham posts about the company

Deere & Co Valuation – March 2018 $DE
Deere & Company Valuation – June 2016 $DE
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

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Disclaimer:

The author did not hold a position in any 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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