- Agriculture and Turf Equipment constitutes 61% of the Trefis price estimate for Deere's stock.
- Construction and Forestry Equipment constitutes 24% of the Trefis price estimate for Deere's stock.
- Financial Services constitute 15% of the Trefis price estimate for Deere's stock.
WHAT HAS CHANGED?
- Impact of Coronavirus On Deere's Stock
Deere’s stock has outperformed the broader markets during the coronavirus crisis period. The stock declined 30% between early February 2020 and Mar 23, 2020, when markets made a bottom. The market has gained roughly 99% since then, and Deere's stock has surged 0ver 3x to levels near $376 (through Aug 23, 2021). This can be attributed to a strong rebound in demand for both - agriculture as well as construction industries equipment.
- Latest Earnings - Q3'21
Deere posted a solid 32% growth in its products sales, led by strong growth across all segments. The company's Net Income grew 129% to $1.4 billion, compared to $628 million in the prior year quarter. On a per share basis, earnings came in at $5.32 in Q3, compared to $2.57 in the prior year quarter. Overall, the company not only posted strong results in Q3, it also expects the momentum to continue in the near term, with revenue forecast to grow north of 25% for the full year 2021.
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.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Deere's value that present opportunities for upside or downside to the current Trefis price estimate for Deere:
- Deere's Agriculture and Turf Equipment Revenue: Deere's Agriculture and Turf Equipment Revenue declined from $29.6 billion in 2013 to $22.8 billion in 2020, due to a weakness in commodity prices and high grain stocks in North America. We expect the figure to reach about $34 billion by 2027, led by increased volume and better price realization. However, in case Deere's revenues grow at a faster rate and reach $40 billion instead, there could be a 10% upside to Deere's current price estimate.
- Deere's Construction and Forestry Equipment Revenues: Deere's Construction and Forestry Equipment Revenues started to decline after 2014 due to weak global demand and slowdown in China, economic concerns in Europe following the Brexit vote and low government spending on infrastructure projects in the United States. Deere's construction industry revenues declined by nearly 25% between 2014 and 2016 and stood at approximately $5 billion in 2016. This figure increased to about $5.9 billion in 2017 before jumping to $10.4 billion in 2018 driven by contribution from the Wirtgen acquisition, coupled with higher shipment volumes and lower warranty claims. Construction revenue grew 10% to $11.5 billion in 2019 driven by higher shipment volumes and price realization, partially offset by the unfavorable effects of currency translation. However, the segment sales plummeted to $9.1 billion in 2020, due to the impact of the pandemic. We expect the segment sales to see a sharp rebound in 2021 and rise gradually thereafter to $18 billion by 2027. However, in case Deere's segment revenues fail to stage a strong recovery and see a slower growth with revenues of $11 billion by 2027, it will imply a 10% downside to Deere's current price estimate.
SOURCES OF VALUE
Agriculture & Turf Equipment Division
Deere’s Agriculture and Turf equipment division is the highest revenue-generating segment for the company. In the fiscal year 2019, the Agriculture and Turf Equipment segment contributed $24.2 billion of the $39 billion revenue generated by Deere. The segment’s 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 for a long period of time.
Growing presence in developing markets
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. In order to achieve further penetration, it also offers financial services. Economic growth and increased spending on agriculture and construction in developing markets offer long-term opportunities for Deere.
Growing population size and affluence
The 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. Increased agricultural output shall drive growth in sales of agricultural equipment. Link
Growing affluence in developing markets
Income levels in developing markets are rising, per capita income for developed markets grew 12.6% from $39,601 in 2011 to $44,592 in 2015. This figure further increased to $53,370 by the end of 2019. The IMF forecasts per capita income for developing markets to grow further and reach around $17,120 by the end of 2024. Link
Migration to urban areas
Large numbers of people are moving to urban areas in search of better jobs and living standards. This phenomenon is even more pronounced in developing markets. This has led to increased spending on infrastructure to support the rising population in urban areas, thereby driving growth in construction equipment sales.
Growing U.S. farm cash receipts
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 over 2015-2018 because of declining commodity prices driven by higher production. However, the trend is expected to reverse post-2019 due to better matching of production and consumption of agricultural products driven by growing population and improving global economic conditions. Link