How Proposed Corporate Tax Cut Would Impact Deere’s Valuation

The Trump administration recently laid out a plan to reduce the federal corporate tax rate to 15% from the current rate of 35%. According to U.S. Treasury data, the average effective tax rate of U.S. companies in 2016 was close to 22%, as net operating losses, international business, tax credits and other items can reduce the effective rate. For Deere (NYSE: DE), the figure has ranged between 28% to 37% in the last five years. The new policy, if implemented, could reduce the company’s effective tax rate to 27%, thus unlocking nearly $100 million in annual cash flows, which could increase its valuation by around 10%. Below we explain further.

Deere Stock Has Upside of 10% If Effective Tax Rate Is Reduced To 20%

Deere paid nearly $380 million in taxes to U.S. federal and state government in 2016. Deere’s income before taxes from its U.S. operations was $967 million in 2016, taking the effective tax rate for its U.S. operations (federal and state combined) to close to 40%. However, this included some deferred taxes from the prior year, and if we average Deere’s effective tax rate in the U.S. for the past few years, it turns out to be very close to the blended average statutory rate (again, state and federal combined) of 39%. If the corporate rate were to be cut to 15%, it is reasonable to believe that the company’s effective U.S. tax rate could be close to 20-22%.

This, in turn, could reduce the company’s overall effective tax rate – including international operations – to around 27%, thus freeing up about $100 million in free cash flow.  This could result in a 10% upside to our price estimate for Deere. Using Trefis technology, you can leverage our interactive platform to visualize how the change in tax rate can impact Deere’s valuation.

For more information, please refer to our complete analysis for Deere

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