Thematic evaluation
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Deere & Co. (DE)

October 15, 2024

Compared to: CNH Industrial NV (CNHI) | AGCO Corp. (AGCO) | Industrial Select Sector SPDR Fund (XLI)

Our reasoning

Deere & Co. appears slightly undervalued based on its below-average EV/EBITDA multiple, strong market position, and growth potential in precision agriculture and emerging markets. However, this is tempered by current revenue declines and macroeconomic challenges in the agricultural sector. The company's valuation doesn't fully reflect its long-term growth prospects and competitive advantages.

Key takeaways
  • Deere & Co. (DE) is a global leader in the manufacturing and distribution of agricultural, construction, forestry, and turf care equipment, with a strong track record of innovation and growth.
  • DE is facing a challenging macroeconomic environment, with declining farm margins, elevated used inventory levels, and high interest rates impacting its revenue and profitability.
  • Despite the challenging environment, DE maintains a strong liquidity position and a solid track record of generating cash flow, suggesting long-term solvency.
  • DE is strategically investing in precision agriculture, automation, and sustainability technologies to drive long-term customer value and expand its presence in emerging markets.
  • DE's valuation metrics are currently below their historical averages, suggesting potential undervaluation relative to its historical performance and growth potential.
  • DE's stock price has been declining in recent months, but the company's long-term growth potential remains intact.
  • Investors should carefully consider DE's risks and opportunities, including the challenging macroeconomic environment, competition, and regulatory risks, before making an investment decision.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Deere & Co. (DE) is a global leader in the manufacturing and distribution of agricultural, construction, forestry, and turf care equipment. The company operates through four segments: Production and Precision Agriculture (PPA), Small Agriculture and Turf (SAT), Construction and Forestry (CF), and Financial Services (FS).
    • DE's primary products include tractors, combines, cotton pickers, sugarcane harvesters, sprayers, turf equipment, construction machinery, and forestry equipment. The company distributes its products through independent dealer networks and major retail outlets globally.
    • DE's target market is comprised of farmers, construction companies, forestry operators, and turf care professionals. The company faces competition from other major manufacturers like AGCO, CNH Industrial, Kubota, and Caterpillar.
    • For comparative analysis, we will be using the Industrial Select Sector SPDR Fund (XLI) as a benchmark and AGCO Corp. (AGCO) and CNH Industrial NV (CNHI) as industry peers.

  2. Financial Performance:

    • DE's revenue has been declining in recent quarters, primarily driven by lower shipment volumes across all major business segments. This decline is attributed to a challenging macroeconomic environment, including declining farm margins, elevated used inventory levels, and high interest rates.
    • Profitability has also been declining, as evidenced by the decreasing net profit margin and EBITDA margin. This decline is driven by lower sales volumes and margin compression.
    • DE's return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) have all been declining in recent quarters. This decline is consistent with the company's declining profitability.
    • Compared to its peers, DE has consistently outperformed AGCO and CNHI in terms of revenue, profitability, and key financial metrics. However, DE's financial performance has been impacted by the challenging macroeconomic environment.

  3. Operational Efficiency:

    • DE's asset utilization efficiency has been improving, as evidenced by the decreasing receivables and inventories. This suggests that the company is becoming more efficient in managing its assets.
    • However, DE's capital expenditure efficiency is decreasing, as investments are not translating into significant revenue or profit growth. This suggests that the company may be overinvesting in its operations.
    • DE's cash flows from operations have been decreasing, primarily due to lower net income and changes in working capital. Capital expenditures are also decreasing, suggesting a slowdown in investment in new equipment and facilities. Net financing cash flows are decreasing, driven by lower debt issuance and higher dividend payments.
    • DE's free cash flow has been decreasing in recent quarters, which could be a concern for investors. The company's free cash flow margin has also been declining, indicating that the company is generating less free cash flow per dollar of revenue.
    • DE's capital expenditure trend is decreasing, while depreciation is increasing. This suggests that the company is investing less in new equipment and facilities, which could impact its future growth potential.
    • DE's dividend and share repurchase sustainability is under pressure due to the declining free cash flow. The company may need to reduce its dividend payments or share repurchases in the future to preserve its financial flexibility.
    • Compared to its peers, DE has generally been more efficient in managing its assets and generating free cash flow. However, the company's recent decline in free cash flow and capital expenditure efficiency is a concern.
    • DE's short-term liquidity position is strong, as evidenced by the increasing cash and short-term investments. However, the decreasing working capital suggests potential challenges in managing short-term obligations.
    • DE's long-term solvency appears stable, with a solid track record of generating cash flow. However, the company's financial leverage is high, as evidenced by the high total debt to total equity ratio and debt to EBITDA ratio.

  4. Growth Opportunities:

    • DE is strategically investing in precision agriculture, automation, and sustainability technologies to drive long-term customer value. These initiatives are aimed at improving efficiency, productivity, and sustainability in the agricultural and construction industries.
    • DE is expanding its presence in emerging markets, particularly in Brazil, through strategic partnerships and investments. The company is also focused on expanding its product offerings and services to meet the evolving needs of its customers.
    • DE's R&D pipeline is focused on developing innovative technologies and solutions that will enhance its product offerings and drive future growth. The company is also investing in digital technologies to improve its customer experience and operational efficiency.
    • DE's strategic focus areas include precision agriculture, automation, sustainability, and digital technologies. The company is making progress on its previously announced initiatives, such as the investment in its Brazilian financing subsidiary.
    • DE's capital allocation strategies are focused on investing in growth opportunities, managing its debt burden, and returning value to shareholders through dividends and share repurchases. The company's capital allocation decisions are aligned with its long-term strategic goals.
    • DE's management team has a history of successfully executing strategic plans. The company has a strong track record of innovation and growth, and its management team is committed to driving long-term value for its shareholders.

  5. Risks and Threats:

    • DE is exposed to fluctuations in commodity prices, acreage planted, crop yields, and government policies that impact agricultural demand. The company also faces risks from supply chain disruptions, material/component shortages, and inflationary pressures.
    • DE's financial services operations are experiencing compression in lending spreads due to rising interest rates, which could continue to weigh on overall profitability. The company also faces legal and compliance risks, including antitrust allegations and cybersecurity concerns.
    • DE faces competition from other major equipment manufacturers, including AGCO, CNH Industrial, Kubota, and Caterpillar. The company's market share is under pressure from these competitors, and the company's ability to maintain its market leadership position is a key risk factor.
    • DE is subject to various regulatory risks, including emissions standards, engine standards, and data privacy regulations. The company's compliance history is a key factor in assessing its ability to navigate these regulatory challenges.

  6. Valuation Analysis:

    • DE's valuation metrics, such as P/E ratio and EV/EBITDA, are currently below their historical averages. This suggests that the company is undervalued relative to its historical performance.
    • Compared to its peers, DE is currently trading at a discount to its peers. This suggests that the market is not fully recognizing the company's strong financial performance and growth potential.
    • Potential catalysts for DE's stock price include an improvement in the macroeconomic environment, increased demand for agricultural and construction equipment, and the successful execution of the company's strategic initiatives.

  7. Price Performance:

    • DE's stock price has been declining in recent months, reflecting the challenging macroeconomic environment and the company's declining financial performance.
    • DE's stock price has been more volatile than the broader industrial sector, as evidenced by its higher beta. This suggests that DE is more sensitive to market movements than the broader industrial sector.
    • Compared to its peers, DE's stock price has outperformed AGCO and CNHI over the past year. However, the company's stock price has been underperforming the broader industrial sector.

  8. Future Outlook:

    • DE's management team has maintained its full-year net income guidance of approximately $7 billion. However, the company's outlook for the Ag and Construction & Forestry industries remains muted, with declines expected across major markets due to a challenging macroeconomic environment.
    • Analyst estimates for DE's future earnings are mixed, with some analysts expecting a decline in earnings in the near term and others expecting a recovery in earnings in the longer term.
    • The consensus view among analysts is that DE's stock price is likely to remain under pressure in the near term, but the company's long-term growth potential remains intact.

  9. Summary:

    • DE is a global leader in the manufacturing and distribution of agricultural, construction, forestry, and turf care equipment. The company has a strong track record of innovation and growth, but it is facing a challenging macroeconomic environment.
    • DE's financial performance has been declining in recent quarters, but the company's liquidity position is strong, and its long-term solvency appears stable.
    • DE is strategically investing in precision agriculture, automation, and sustainability technologies to drive long-term customer value. The company is also expanding its presence in emerging markets.
    • DE faces risks from fluctuations in commodity prices, supply chain disruptions, and competition from other major equipment manufacturers. The company also faces regulatory risks.
    • DE's valuation metrics are currently below their historical averages, suggesting that the company is undervalued relative to its historical performance.
    • DE's stock price has been declining in recent months, but the company's long-term growth potential remains intact.
    • DE's future performance will depend on the macroeconomic environment, the company's ability to execute its strategic initiatives, and its ability to manage its risks.
    • DE's valuation assessment is positive, considering its strong financial performance and growth potential. However, the company's high debt levels and declining free cash flow are concerns.
    • DE's growth potential is balanced against its identified risks, including the challenging macroeconomic environment, competition, and regulatory risks.
    • DE's management team has a history of successfully executing strategic plans, but the company's ability to navigate the current downturn and position itself for a potential market recovery in 2025 is a key factor for future performance.
    • DE's position relative to analyzed industry trends is positive, as the company is a leader in its industry and is well-positioned to benefit from the long-term growth of the agricultural and construction industries.
    • Potential catalysts for DE's stock price include an improvement in the macroeconomic environment, increased demand for agricultural and construction equipment, and the successful execution of the company's strategic initiatives.
    • Headwinds for DE's stock price include the challenging macroeconomic environment, declining farm margins, elevated used inventory levels, and high interest rates.
    • Overall, DE is a well-established company with a strong track record of innovation and growth. The company is facing a challenging macroeconomic environment, but its long-term growth potential remains intact. Investors should carefully consider the company's risks and opportunities before making an investment decision.
Peer fundamentals 
Fundamentals
Insights
  • Deere & Co. is facing a challenging market environment, with declining sales volumes and profitability.
  • The company is taking steps to manage costs, but these efforts are not fully offsetting the impact of lower sales.
  • The company's profitability is under pressure, and this trend is likely to continue in the near term.
  • The company's liquidity position is strong, but its working capital is decreasing, suggesting potential challenges in managing short-term obligations.
  • The company's financial leverage is high, but its long-term solvency appears stable, with a solid track record of generating cash flow.
  • The company's asset utilization efficiency is improving, but its capital expenditure efficiency is decreasing, as investments are not translating into significant revenue or profit growth.
  • The company's free cash flow is decreasing, which could be a concern for investors.
  • The company's strategic initiatives, such as the investment in its Brazilian financing subsidiary, are aimed at reducing financing risks and supporting growth in key markets.
  • The company's outlook for the Ag and Construction & Forestry industries remains muted, with declines expected across major markets due to a challenging macroeconomic environment.
  • The company is strategically investing in precision agriculture, automation, and sustainability technologies to drive long-term customer value, but these initiatives may pressure margins in the near-term.
  • The company's financial flexibility will be impacted by its debt levels, and it will need to carefully manage its debt burden to maintain financial stability.
  • The company's free cash flow is likely to remain under pressure in the near term, which could limit its ability to invest in future growth opportunities.
Analysis
  • Revenue - Revenue is decreasing, primarily driven by lower shipment volumes across all major business segments. - This decline is attributed to a challenging macroeconomic environment, including declining farm margins, elevated used inventory levels, and high interest rates. - The company is proactively managing inventory levels and aligning production with demand, which is contributing to the lower sales volumes.
    • Profitability
      • Profitability is declining, as evidenced by the decreasing net profit margin and EBITDA margin.
      • This decline is driven by lower sales volumes and margin compression.
      • The company is taking steps to manage costs, but these efforts are not fully offsetting the impact of lower sales.
    • Liquidity
      • The company's liquidity position is strong, as evidenced by the increasing cash and short-term investments.
      • However, the decreasing working capital suggests potential challenges in managing short-term obligations.
    • Solvency
      • The company's financial leverage is high, as evidenced by the high total debt to total equity ratio and debt to EBITDA ratio.
      • However, the company's long-term solvency appears stable, with a solid track record of generating cash flow.
    • Operational Efficiency
      • The company's asset utilization efficiency is improving, as evidenced by the decreasing receivables and inventories.
      • However, the company's capital expenditure efficiency is decreasing, as investments are not translating into significant revenue or profit growth.
    • Cash Flow Analysis
      • Cash flows from operations are decreasing, primarily due to lower net income and changes in working capital.
      • Capital expenditures are decreasing, suggesting a slowdown in investment in new equipment and facilities.
      • Net financing cash flows are decreasing, driven by lower debt issuance and higher dividend payments.
    • Risk Factors
      • The company is exposed to fluctuations in commodity prices, acreage planted, crop yields, and government policies that impact agricultural demand.
      • The company faces risks from supply chain disruptions, material/component shortages, and inflationary pressures.
      • The company's financial services operations are experiencing compression in lending spreads due to rising interest rates, which could continue to weigh on overall profitability.
      • The company faces legal and compliance risks, including antitrust allegations and cybersecurity concerns.
    • Future Outlook
      • The company's outlook for the Ag and Construction & Forestry industries remains muted, with declines expected across major markets due to a challenging macroeconomic environment.
      • The company is strategically investing in precision agriculture, automation, and sustainability technologies to drive long-term customer value, but these initiatives may pressure margins in the near-term.
      • The company's financial flexibility will be impacted by its debt levels, and it will need to carefully manage its debt burden to maintain financial stability.
      • The company's free cash flow is likely to remain under pressure in the near term, which could limit its ability to invest in future growth opportunities.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-14)
Industrial Select Sector SPDR Fund (XLI)
  • Performance Comparison: DE has consistently underperformed XLI across all historical periods, indicating that DE has struggled to keep up with the broader industrial sector's growth. This underperformance has been particularly pronounced over the past two years, with DE lagging behind XLI by a significant margin.
  • Risk and Return Analysis: DE has provided lower annualized returns than XLI, suggesting that DE has not been as profitable as the broader industrial sector. However, DE has also been significantly more volatile than XLI, indicating a higher risk profile. DE's maximum drawdown of 33.81% is significantly larger than XLI's 21.64%, highlighting the greater potential for losses with DE.
  • Risk-Adjusted Performance: XLI has consistently offered a better risk-adjusted return than DE, as evidenced by its higher Sharpe ratio. This suggests that XLI has been more efficient in generating returns relative to its risk. DE's higher beta indicates that it is more sensitive to market movements than XLI, further supporting the notion that DE carries a higher risk profile.
  • Overall Assessment: DE has consistently underperformed XLI in terms of both absolute and risk-adjusted returns. DE's higher volatility and larger drawdowns indicate a significantly higher risk profile compared to XLI. While DE's recent trends suggest a potential stabilization in its risk profile, it remains a riskier investment than XLI. Investors seeking exposure to the industrial sector may find XLI a more attractive option due to its superior performance and lower risk.
Peers Price History(as of 2024-10-14)
CNH Industrial NV (CNHI)AGCO Corp. (AGCO)
  • Performance Comparison:
    • Deere & Co. (DE) has consistently outperformed its peers, AGCO Corp. (AGCO) and CNH Industrial NV (CNHI), over all the specified periods. This outperformance is particularly notable over longer periods, such as the 3-year period, where DE's return was 27.51% compared to -12.07% for AGCO and -19.62% for CNHI.
    • DE's performance has been relatively consistent, consistently outperforming its peers across different timeframes.
  • Risk and Return Analysis:
    • DE has generated higher annualized returns than its peers over all the specified periods. For example, over the 3-year period, DE's annualized return was 8.44% compared to -4.2% for AGCO and -7.02% for CNHI.
    • DE's annualized volatility has generally been lower than its peers, particularly in the first half of 2022. However, DE's volatility increased significantly in Q2 2022, reaching a peak of 61.94% in June 2022.
    • DE's maximum drawdown of 33.81% in July 2022 is lower than AGCO's 38.62% in July 2022 and CNHI's 43.69% in November 2023. This suggests that DE has a lower risk profile than its peers, as it has experienced smaller peak-to-trough declines.
  • Risk-Adjusted Performance:
    • DE's Sharpe Ratio has generally been higher than its peers, indicating a better risk-adjusted return. This suggests that DE has been able to generate higher returns for the level of risk it takes on.
    • DE's beta value has consistently been below 1, while AGCO and CNHI's betas have generally been above 1. This indicates that DE is less sensitive to market movements than its peers, further supporting its lower risk profile.
  • Overall Assessment:
    • DE has consistently outperformed its peers in terms of both absolute and risk-adjusted returns. Its lower volatility and smaller drawdowns suggest a lower risk profile compared to AGCO and CNHI.
    • DE's lower beta further supports its lower risk profile, indicating that it is less sensitive to market movements.
    • While DE's volatility increased significantly in Q2 2022, it has since stabilized and remained relatively lower than its peers.
    • Overall, DE appears to be a more attractive investment option than its peers, offering a better balance of risk and return.
Peers Fundamentals(as of 2024-07-31)
CNH Industrial NV (CNHI)AGCO Corp. (AGCO)
  1. Market Position and Size:
    • Deere & Co. (DE) is the dominant player in the agricultural equipment industry, with a market cap significantly larger than its peers, AGCO Corp. (AGCO) and CNH Industrial NV (CNHI). This size advantage is reflected in DE's significantly higher revenue, EBITDA, and net income.
  2. Profitability and Efficiency:
    • DE exhibits significantly higher profitability compared to its peers and the industry average, demonstrating its ability to manage costs effectively and generate strong profits. DE also demonstrates superior efficiency in generating returns, consistently outperforming its peers in terms of Return on Average Assets, Return on Average Total Equity, and Return On Average Invested Capital.
  3. Financial Health and Stability:
    • DE's financial health is strong, characterized by high profitability, strong cash flow generation, and a solid track record of growth. However, its high debt levels and lower liquidity are potential concerns. While its strong profitability and cash flow generation provide some cushion against potential financial distress, its high debt levels and lower liquidity could limit its ability to respond to unexpected economic downturns or industry disruptions.
  4. Valuation and Market Perception:
    • DE's valuation metrics are generally higher than its peers and the industry average, reflecting its strong financial performance and market position. However, its high valuation suggests that the market has high expectations for its future growth and profitability, which may not be fully realized.
  5. Cash Flow and Capital Management:
    • DE generates strong cash flow compared to its peers, considering its significantly larger market cap. This strong cash flow generation is a key strength, supporting its high debt levels and providing flexibility for future investments and shareholder returns.
  6. Growth and Future Prospect:
    • DE's growth metrics present a mixed picture. While DE has shown strong growth in net income and earnings per share, its sales and EBITDA growth have been more volatile. The deceleration in recent growth rates for key metrics like sales and EBITDA raises concerns about the sustainability of its growth trajectory.
  7. Potential for Investment:
    • DE presents a mixed investment proposition. Its strong profitability, efficiency, and cash flow generation capabilities, coupled with its dominant market position, make it an attractive investment. However, its high debt levels, lower liquidity, and potential growth deceleration are concerns that investors should carefully consider.
  8. Key Risks and Considerations:
    • Key risks for investors include DE's high debt levels, lower liquidity, and potential growth deceleration. These factors could impact its ability to respond to unexpected economic downturns or industry disruptions and may limit its future growth potential.
  9. Overall Assessment:
    • Deere & Co. (DE) is a financially strong company with a dominant market position in the agricultural equipment industry. Its high profitability, efficiency, and cash flow generation capabilities are key strengths. However, its high debt levels, lower liquidity, and potential growth deceleration are concerns that investors should carefully consider. Overall, DE remains a solid investment, but its future performance will depend on its ability to manage its debt levels, improve its liquidity, and maintain its growth trajectory.