VALUATION HIGHLIGHTS

1. Agriculture and Turf Equipment constitutes 66% of the Trefis price estimate for Deere's stock.
2. Construction and Forestry Equipment constitutes 33% of the Trefis price estimate for Deere's stock.

WHAT HAS CHANGED?

1. DE Stock Performance

DE stock has shown strong gains of 30% from levels of $270 in early January 2021 to around $355 now (mid-February 2024), vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

However, the increase in DE stock has been far from consistent. Returns for the stock were 27% in 2021, 25% in 2022, and -7% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that DE underperformed the S&P in 2023.

2. Latest Earnings - Q1'24

Deere posted a 7% fall in equipment sales, which stood at $10.9 billion in Q1'24. While construction and forestry segment sales were flat, production and precision agriculture sales were down 7%, and small agriculture and turf sales were down 19% y-o-y.

The company's net income fell 10.6% to about $1.75 billion, compared to $1.96 billion in the prior-year quarter. On a per-share basis, earnings came in at $6.23 in Q1'24, compared to $6.55 in the prior-year quarter. Overall, the company's sales and earnings were above the street estimates. However, Deere provided a bleak outlook for fiscal 2024, with net income forecast to be in the range of $7.50 and $7.75 billion.

BUSINESS SUMMARY

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. However, it recovered to $36.2 billion in 2022. We expect the figure to reach about $45 billion by 2030, led by increased volume and better price realization. However, in case Deere's revenues grow at a faster rate and reach $55 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 a 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, segment sales plummeted to $9.1 billion in 2020 due to the impact of the pandemic. The segment sales saw a sharp rebound to $11.6 billion in 2021 and $12.8 billion in 2022. We expect the segment sales to rise gradually to $19 billion by 2030. However, in case Deere's segment revenues fail to see steady growth and hover around the $13 billion mark over the coming years, it will imply nearly 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 2022, the Agriculture and Turf Equipment segment contributed $36.2 billion of the $52.6 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 requirements 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.

KEY TRENDS

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 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, such as the U.S., stands at over $70,000 currently, rising 10% from levels seen in 2018, while for China, it's around $19,000, rising a significant 25% over the same period.

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.