Deere and Co: The Stag that Never Quits

With the new and sexy tech IPOs occurring in recent months, we thought we would analyze a completely different type of company, Deere and Co. (more recognizable by the name John Deere). A market cap of $34 Billion makes the company a behemoth in size and on top of this, it has existed since its inception by Mr. Deere in 1837! However, is the yellow stag good enough to have a place in your portfolio? We believe Deere and Co. should have a place in your portfolio and perhaps your farm as well (if you are part of less than the 1% of the population who owns one)!

Diversification

When you think of John Deere, your mind immediately imagines a big green tractor in an expansive, picturesque farm in the Midwest. While agriculture products make up a large portion of their sales, the company also provides turf, construction, forestry and even a financial services segment. The result is a company which operates in many different sectors and its performance isn’t completely tied to the agriculture market. This diversification aids the company in sustaining steady profits rather than being solely dependent upon the performance of the agriculture market and commodity prices.

Brand

Perhaps the best reason to be a shareholder of Deere and Co. is due to its brand power. The company has been in the United States since the early 19th century and has always been directly associated with the agriculture and farm industry. The John Deere image has become so respected and admired that vintage signs and products can be worth thousands in the antique market. By buying Deere and Co. you are not just buying a stalwart in the industry, but also a name that is prized and respected by millions of Americans who regard the company as an American staple that is synonymous with Uncle Sam and apple pie. There is certainly a loyal customer base who will only choose the yellow stag since “nothing runs like a Deere” ™.

Internationally, Deere and Company sells its products to distributors in over 100 countries across the globe. This implies that there is international demand for goods with the “John Deere” stamp over domestically produced equivalents. Thus, there is further diversification as the company has exposure to many different markets.

Dividend Growth?

This is certainly a highlight of ownership. While the dividend yield is modest for the company (2.22%), its dividend growth track record has been impressive. The 5-year dividend growth for this company has been at 12.85% vs. 6.05% for its peers. While we would like to see DE paying out a larger dividend, the trend of increasing their payout to investors certainly provides a case to invest.

It is also important to note that the payout ratio of Deere and Co. is only 22% of the company’s total profit. This implies that there is room to increase dividends to shareholders which is reinforced by their dividend growth trend.

Future Earnings?

In the short term, Deere and Co. is expecting a 6% decline in sales for their agriculture and turf segments for the 2014 year due to lower commodity prices and lower profitability in the farming sector. However, construction and forestry sales are expected to increase by roughly 10% due to the pickup in global economic activity. Their financial services division is also expected to see a slight increase in profits. While there is concern of sales in the agriculture and turf segments decreasing in the future (even beyond a year), we believe the company’s diversification will help offset this loss in revenue.

Over the long haul, the company is still expected to post a 14% increase in its 5-year earnings per share growth rate. For the size of company that Deer and Co. is, this growth rate is impressive and suggests confidence in its overall growth despite market fluctuations in the agriculture market. This is most likely due to their diversified products and services which we have outlined.

Valuation

Once again, Deer and Co. shines through in regard to its value. DE currently trades at ($91.83 ) and we believe the stock is undervalued based on the following multiples.

The company sports a P/E normalized ratio of 10, which is substantially lower than the 21 P/E normalized ratio which the company’s peers have as a collective. Similarly, Deere and Co. has a price to book ratio of 3.6 which is still under the industry average of 5.1.

However, one reason for concern is that Deere and Co. has accrued a higher amount of debt than its competitors, which may have shied away potential investors. DE has a debt to equity ratio of 3.4 vs. 1.4 of it’s peers. While we believe the company is in a sound financial position and is solvent, there is still a reason to factor this debt into the analysis.

Despite the amount of debt to equity which the company has, we still see value and a margin of safety due to its rather low P/E and P/B ratio when compared to competitors. Overall, the company is trading at a discount to the industry and there is certainly a case to buy, based on the few multiples we covered.

Verdict

Even the Titan of value investing, Warren Buffett and his friend Bill Gates have accumulated a substantial position in the company. Mr. Buffet himself owns nearly four million shares of Deere and Co.  He most likely sees the long term value in the company as well as the potential to see greater dividends being payed out in the future.

Deere and Co. is a company that has survived some of the most tumultuous business cycles in American history including the Great Depression. Its name has been around for decades and will most likely continue to thrive for decades into the future. Based on the current valuation, we believe that the market has overlooked the yellow stag and there is certainly a margin of safety by taking a position now. The investor will also be exposed to a trend in the growing dividend payout and can compound their investment over the period, when they decide to own it. In the end, by taking a position in Deere and Co. we believe you are taking a position in perhaps the best brand name in the industry, with excellent prospects for the future growth.

All the Best,

Jim and Brian

All data as of 04/06/2014

Multiples and stock price taken from Scottrade

Revenue and future forecasts taken from Deere and Co. 10-K (December, 2013)

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