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Investment Overview for Deere (NYSE:DE)
Deere & Company, also commonly known as John Deere, is an agriculture and construction equipment manufacturer based out of Moline, Illinois. It also manufactures turf and forestry equipment and service parts for its products.
Apart from its equipment manufacturing operations, Deere also has a financial services division that offers financing solutions for sales and leases of its products.
Deere has an established global presence through its manufacturing plants, joint ventures and dealers.
Below are key drivers of Deere's value that present opportunities for upside or downside to the current Trefis price estimate for Deere:
Increase in the Agriculture and Turf Equipment market
- World Agricultural Equipment Market Size: World Agricultural Equipment Market declined significantly in 2015 and 2016 because of lower commodity prices, slowdown in China and short term uncertainties in Brazil and EU-28. If the situation starts recovering because of the low energy prices and policy reforms in China, Brazil and India, Deere could be looking to target a market of around $22.5 billion with its Agriculture and Turf Equipment segment. However, at present, only the Indian economy seems to be recovering at a decent pace, though there have been signals of recovery in European markets as well. If the market exceeds our expectations and sees unprecedented growth in the coming years, it could add nearly $3 billion over our current estimates leading to nearly 10% upside to our Trefis price estimate for Deere. This is assuming that the global agriculture and turf equipment market reaches above $180 billion by the end of our forecast period.
Market Share decline
- Deere's Agriculture and Turf Equipment Market Share and Deere's Construction and Forestry Equipment Market Share: Deere's Agriculture and Forestry Equipment market share has declined significantly over the last couple of years. Deere laid off about 125 employees from two of its north American plants in 2015. Deere did not make significant investments in the developing countries in the past year. Its Construction and Forestry Equipment division also saw a decline in the market share in 2016. Deere cut back its SG&A significantly in 2016, which leaves little space for further decrease in costs. If Deere's competitors fare well in the market in the coming years, Deere may lose its existing market share significantly which in turn can be a downside of about 10%. This is assuming that Deere's Agriculture & Turf Equipment and Construction & Forestry equipment market share decline to about 11% and 3.8% respectively, by the end of our forecast period.
Agriculture and Turf Equipment Division
Deere’s Agriculture and Turf equipment division is the highest revenue generating segment for the company. In the fiscal year 2016, the Agriculture and Turf Equipment segment contributed $19 billion out of a total of $27 billion revenue generated by Deere. The segment’s relatively high margins combined with the large market share that Deere commands in the Agricultural equipment industry will ensure long time profitability for the company. Additionally, driven by the food requirement of the growing population, the segment is positioned to grow in the long run.
Deere has a strong presence in developing markets such as India, China, and Latin America. It has manufacturing plants, distribution centers, warehouses and sales offices to cater to demand in these developing markets, and also offers financial services. Economic growth and increased spending on agriculture and construction in developing markets offer long term opportunity for Deere.
Growing population size and affluence
Global population is expected to continue growing, thereby driving demand for food for sustenance and encouraging an increase in agricultural output. The Food and Agriculture Organization of the United Nations believes that agricultural production will have to increase by 70% in order to cater to the additional 2.15 billion population of the world by 2050. The increased agricultural output is likely to drive growth in sales of agricultural equipment. Link
Economic slowdown in major economies including China, U.S. and EU-28
China's GDP growth in 2016 was the lowest in the last 25 years, and it has impacted other major economies. Link Europe's growth is expected to continue but the recovery is slow because of short-term uncertainties regarding economic policies.Link
Growing affluence in developing markets
Income level in developing markets is rising, with per capita income growing 23% from $6,623 in 2011 to $8,144 in 2013. The IMF forecasts per capita income for developing markets to grow further by 20% from 2015 levels by the end of 2018. Link
Migration to urban areas
An increasing number of people are moving to urban areas in search for better jobs and living standards. This phenomenon is more pronounced in developing markets and has led to increased spending on infrastructure to support the rising urban population, thereby driving growth in construction equipment sales.
Growing U.S. farm cash receipts causing low commodity prices
U.S. farm cash receipts, which indicate income received from the sale of crops and livestock, have been growing. From 2010 to 2014, cash receipts grew 29.5%. (Link) Farm cash receipts declined in 2016 because of declining commodity prices are driven by higher production. However, the trend is expected to reverse post-2018 due to better matching of production and consumption of agricultural products driven by growing population and improving global economic conditions. Link
Rise in interest rates may moderate the market growth
Central banks had to raise interest rates in order to curb high inflation in many of the developing countries. High-interest rates raise borrowing costs for companies and individuals. This affects the demand and market growth. As the U.S. economy started registering sustained growth following the financial crises of 2008-09, the Fed has started to taper its Quantitative Easing program which was implemented to keep interest rates low. Fed may begin to increase rates in 2016. (Link)
This rise may reflect in the Interest Rate on Loans of Financial Services division due to a rise in borrowing costs for Deere.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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