Monday, November 30, 2015

Analysis of Deere 2015

Deere, an American outdoor machinery producer

Company: Deere

ISIN US2441991054 | WKN 850866

Business: An American outdoor machine producer. They have eight different product categories: Residential (lawn mowers), Agriculture (tractors etc.), Construction (Trucks and Loaders), Landscaping & Grounds Care (commercial lawn mowers), Golf & Sports (fairway mowers etc.), Forestry (harvesters and dozers), Engines & Drivetrain (diesel engines and generators), Specialized (military and rental). Their largest is however Agriculture and most people in countries conducting modern agriculture will have have seen the beautiful Deere logo.

Active: 30 countries world wide. Focus on US, Canada, Europe, Brazil, Russia, India and China. I was surprised to see that they did not mentioned Africa but maybe the infrastructure need to improve much more before Deere can establish themselves stronger there.

P /E: 13.9

Here you can find the previous analysis of Deere.

The P/E of Deere is reasonable with 13.9 but the P/B is a bit high with 4.0 which gives us a no go according to Graham. I still find that the earnings to sales are ok with 7% and they have an excellent ROE of almost 29%! The book to debt ratio is however awful with 0.13 but it comes to a large extent from them having a large financing service.
In the last five years they have had a yearly revenue growth rate of -2.1% which gives us a motivated P/E of 8 to 10 which means that Deere today is fairly valued on the market.
They spend a large quantity of money on research since it represents 74% of their earnings but in this situation I hope that will be part of the solution for moving forward in 2016 and beyond.
They pay a fully acceptable dividend of 3% which correspond to 41% of their earnings so also that is fully ok. 

Conclusion: Graham is saying no to Deere and I say yes. The P/E and the dividend is ok and this being a tough year for them I still find that they as a company are looking good. Of course part of the reason why I say yes is that I believe that the farmers all over the world will continue to buy products from Deere and that there are many farmers in the world that have as the highest point on their Christmas list to buy some Deere machinery once they will be able to afford it. So I see due to this analysis no reason to sell my shares and I will more be inclined to increase my position in the future.

If this analysis is outdated then you can request a new one.


hmmm said...

An analysis completely ignoring their mining exposure?...

Fredrik von Oberhausen said...

Hi hmmm,

Freely quoted from Bill Gates "The product that stands for 80% of your sales should also receive AT LEAST 80% of your attention".

I see no reason why I as an investor should think different in comparison to how managers should look upon their product portfolio, research allocation and the attention of their sales force. The mining and forestry equipment amounts, combined, to around 20%. The sales to the mining continent Australia amounts to 3% of the total. How much should I care if that drops to 1.5%?

Additionally... the mining industry have been in trouble for many years now. In the start many of them cut their work-force and I am sure they stopped any investments into new equipment and they did everything they could to make sure that the equipment would be usable for as long as possible.

They have been doing that for a couple of years already and they will probably go on for a couple of more... when things get really bad they will maybe use the financing services so that they are not forced to put all the money on the table at once. What is of importance to me however... is when they have money again what then?

What will they then buy? If the answer is Deere then I have no problems with sales being pushed forward.

Why are you so worried of the mining industry and why in your opinion should I be worried about it?

Anonymous said...

The Problems in the mining sector are no problem for a contrarian Investor. It´s an opportunity.

Fredrik von Oberhausen said...

That is indeed true but in that case I would go directly for a heavy mining company such as BHP Billiton and not a company with as little exposure as Deere towards the industry.

Oh, and I am already invested into the mining industry with K+S.