New Coverage: $100 Trefis Price Estimate For Deere & Co

Deere & Company (NYSE:DE), popularly known as “John Deere” after the name of its founder and brand name, is a Moline, Illinois based agriculture and construction equipment manufacturing company. Apart from its equipment offerings, Deere also provides financial support for the purchase of its products through its financial services arm. Deere has considerable presence across the globe with more than a third of its revenues generated from regions outside U.S and Canada.

We have broken down the company into the following divisions:

1. Agricultural & Turf Equipment
2. Construction & Forestry Equipment
3. Financial Services
4. Unconsolidated Equipment Affiliates

In this article, we give you a brief overview of each of these divisions and look at the key trends impacting the divisions.

We have a price estimate of $100 for Deere, which is about 10.5% above its current market price.

Agricultural & Turf Equipment division

Deere’s Agriculture & Turf Equipment segment manufactures and distributes agriculture and turf equipment and related service parts. It offers tractors, harvesters, balers, mowers, forage, tillage equipment, sprayers and seeding equipment under its agriculture product portfolio and utility vehicles, mowers, snow and debris handling equipment, golf and turf care under its turf equipment portfolio. The segment also offers agricultural management systems technology and solutions that help farmers control costs and improve yields.

The Agriculture & Turf Equipment segment accounts for a majority of Deere’s revenue. In the fiscal year 2013, Deere generated 77% of its revenue from the segment. ^[1] Given the segment’s significant contribution to the company’s revenue, it forms 80% of our stock price estimate of Deere.

Deere’s Agriculture & Turf Equipment commands 18% of the global agriculture and turf equipment market. However, moving forward we expect to see a small decline in its market share due to the sale of its John Deere Landscape and Water units. John Deere Landscape generated around $1 billion ^[2] in revenue for the company whereas John Deere Water generated around $220 million. ^[3] Deere has retained a 40% equity stake in John Deere Landscape unit whereas it has sold 100% ownership of John Deere Water.

The major trends impacting the segment are growth in population and farmer’s income. Global population is expected to keep on growing, thereby driving demand for food for sustenance and encouraging a rise in agricultural output. The Food and Agriculture Organization of the United Nations believes that agricultural production will have to be increased by 70% in order to cater to the additional 2.15 billion population of the world by 2050. ^[4] Increased agricultural output shall drive growth in sales of agricultural equipment.

U.S. farm cash receipts, which indicates income received from sale of crops and livestock, has been growing driven by increasing agricultural commodity prices. From 2010 to 2013, cash receipts grew 24.1%. ^[5] As the income of farmers increase, their purchasing capacity would increase leading to growth in agricultural equipment sales. Farm cash receipts are forecast to decline over 2014-2015 because of declining commodity prices, driven by higher production. However, the trend is expected to reverse post-2015 due to better matching of production and consumption of agricultural products driven by growing population and improving global economic conditions.

Considering Deere’s large market share in the agricultural equipment market and its global presence, we believe it is well positioned to benefit from these two trends. This is why we have forecast the segment’s revenue to grow throughout our forecast period till 2020, except for the slowdown in 2014-2015.

Construction & Forestry Equipment

Deere’s construction and forestry segment primarily manufactures and distributes machines and service parts used in construction, earthmoving, material handling and timber harvesting. It offers backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, landscape loaders, skid-steer loaders, log skidders, feller bunchers, log loaders, log forwarders, log harvesters and related attachments. The segment also offers technology solutions that lets customer connect with its equipment in order to keep track of its location, utilization and health, thereby enabling increase in efficiency and productivity. The segment contributed 15.5% towards overall revenue in the fiscal year 2013 ^[1] and accounts for 10.5% of our price estimate for Deere.

Unlike Deere’s Agriculture and Turf Equipment segment, it’s Construction and Forestry segment has a low market share of 4% and is outweighed by giants such as Caterpillar (market share of 15%) and Volvo. Deere has been aggressively trying to expand its global presence in the construction equipment space to gain market share. Early in 2013, Deere announced that it will invest $50 million in its construction and forestry business in China. In February 2014, Deere inaugurated two manufacturing facilities in Brazil, of which one is a joint venture with Hitachi. Deere will be opening a distribution center in Nagpur, India in late 2014.

U.S. construction spending has a major impact on Deere’s Construction and Forestry segment. In the fiscal year 2013, Deere’s revenue from the segment declined 8% due to reduced U.S. government spending and a decline in public construction projects. Spending on public construction projects in U.S. declined 5% from 2011 to 2013. ^[6] Considering the 0.96% increase in construction spending from February 2014 to May 2014 and strong growth in the housing market, we believe Deere may see high single digit growth in its revenue from the segment in 2014.

Financial Services division

The financial services segment finances sales and leases of new and used agriculture, turf, construction and forestry equipment, through loans and revolving charge accounts. It provides wholesale financing to dealers for inventories of the equipment, and also finances and services operating loans. The segment also offers crop insurance products and extended equipment warranties.

The various financing options offered by the financial services operations are designed to stimulate sales of Deere’s equipment and generate financing income for the financial services segment.

Revenues from the segment are sensitive to the interest rate environment. For the past few years, interest rates in the U.S have been declining due to the impact of the Quantitative Easing program wherein the Fed has been purchasing government securities from the market in order to lower interest rates and increase money supply. This led to a decline in Deere’s interest rate on loans which dropped from 7.9% in 2010 to 6.4% in 2013. Once the Quantitative Easing program ends in late 2014, interest rates may begin to increase in 2015 ^[7] which may lead to an increase in lending rates by Deere. However, this will have a similar impact on Deere’s borrowing rates leading to a relatively stable spread between Deere’s lending and borrowing rates.

Unconsolidated Equipment Affiliates

Unconsolidated Equipment affiliates are the companies where Deere owns 20%-50% of the outstanding shares and are accounted for under “Equity in income (loss) of unconsolidated affiliates” in the income statement. These companies are primarily involved in manufacturing and marketing of construction equipment. The investments primarily consist of Bell Equipment Limited (32% ownership), Deere-Hitachi Construction Machinery Corporation (50% ownership) and Ashok Leyland John Deere Construction Equipment Company Private Limited (50% ownership).

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1. Deere’s 2014 10-K SEC Filing, www.deere.com [↩] [↩]
2. CD&R Buys John Deere Landscapes in $465 Million Carve-Out, October 28 2013, www.bloomberg.com [↩]
3. FIMI wins auction for control of John Deere Water, February 17 2014, www.haaretz.com [↩]
4. Food production will have to increase by 70 percent – FAO convenes high-level expert forum, www.fao.org [↩]
5. US Farm Cash Receipts, www.ers.usda.gov [↩]
6. Construction Spending, www.census.gov [↩]
7. US Federal Reserve hints at interest rate rise in 2015, March 20 2014, www.bbc.com [↩]