About John Deere & Company
The Moline, Illinois-based farming company has been around since 1837.
From construction to landscaping to tractors and trailers, John Deere & Company leads many of these industries (and more). In fact, the green and yellow gargantuan has solidified a spot in the top five largest agricultural companies in the world.
While Deere & Company’s heartbeat is in North America, it is seldom mentioned that they also have extensive business operations globally. Specifically, equipment from the company (primarily tractors) is manufactured across China, Mexico, Brazil, and many other nations.
Simply, as it relates to how the company makes money, their primary revenue streams consist of selling agricultural equipment, construction equipment and leasing, financing its products and in the past, crop insurance!
Fun fact: The legend stands that John Deere, the founder, fled to Moline, Illinois in order to evade bankruptcy in Vermont. It’s likely safe to assume he and his descendants are riding their green tractors all the way to the bank.
Deere & Company’s Numbers
So, Deere & Company is an iconic American company as well as a force to be reckoned with.
However, agricultural clout aside, we like numbers and objectivity. Is Deere & Company stock worth investing in today?
John Deere & Company is a $117 billion company (given Deere’s current market capitalization).
The company administers a healthy annual dividend of $4.20 coupled with an annual $18.04 earnings per share (in the past). Surprisingly, Deere & Company’s price to earnings ratio (P/E) sits at just above 20, touting the fact that the stock is still technically trading at fair valued.
Deere & Company’s Price and Value
This is a prime example of fair value, fair price. Specifically, many investors likely look at Deere’s current stock price of $381.93 (as of 3/3/2022) and dismiss the stock altogether. While investors should absolutely be aware of their financial circumstances and not necessarily put money in the stock market when they need to pay their bills, they should also be fully aware that high price doesn’t necessarily equate to high value, or a stock being overvalued.
At the same time, a stock trading at or near fair value (what the company is worth), doesn’t necessarily mean that you’re a stock picking genius and all that Deere stock is going to do is rise in value.
No company, no matter how financially sound or how much of an economic tailwind it maintains, is completely immune to greater overall economic downturns, bad press days, or unfavorable government legislation (or simple talks involving this).
Suffice it to say, even if you find the most undervalued stock in the world, the share price can still go down!
While we have spent a considerable amount of time discussing value, we also do not believe one metric tells a company’s entire financial story.
Deere & Company Stock’s Big Picture
Let’s get a bigger and better idea of the macroeconomic and individual stock picture as it relates to Deere & Company.
As expected, Deere’s total assets outweigh its total liabilities by a healthy margin; we didn’t anticipate any issues there. Peeking at the company’s income statement, their total revenues since Q1 2021 have been generally, steadily increasing, showing resilience through COVID-19 and the emergence of its variants.
Jumping over to Deere’s cash flow statement, their total cash from operations has had an impressive rise of north of 5,000% over the last handful of fiscal quarters. This astronomic increase is likely attributable to their collection of their accounts receivables over that span of time (ie. collecting money owed to Deere & Company).
There don’t appear to be any major causes for concern within their primary financial statements. Let’s talk more about value, however, let’s go above and beyond the company’s price to earnings ratio.
Deere & Company is able to churn out a solid profit. While their annual gross profit margin is almost equal to that of the industry’s average, their annual operating profit margin, a key contributing factor involving a company’s ability to turn a profit, is nearly 20% while the industry’s average is -.58%.
This leads to Deere & Company maintaining an above average annual net profit margin of 13.51% compared to the industry’s 7.88%.
Some companies that lead their industries lack the ability to carve out an impressive enough profit.
Thankfully, Deere isn’t one of those companies.
Deere’s Financial Strength
In terms of annual revenue growth, Deere sits roughly 7% above its industry. Whether or not you believe this growth is sustainable, the company is likely to find ways to increase their growth possibly through acquisitions, as they’ve done in recent history (an example of inorganic growth) or with new product lines and innovations (organic growth).
Deere & Company is also quite efficient with their capital. For instance, their annual return on equity rests around 12% above its competition and, an interesting metric, achieves considerably higher annual revenue per employee than fellow ag giants! Specifically, the latest annual revenue per employee numbers for Deere sit at almost $583,000 to the industry’s nearly $400,000.
Finally, if our team had to have any qualms with Deere’s financials, they are relatively leveraged. What does this mean? In essence, Deere & Co. employs a fair amount of debt in order to operate at the rate it does. However, after further investigation, Deere holds a solid interest coverage (measures a company’s ability to pay down its debt), and they are an established company in both their industry and relative to the greater overall economy, so we don’t deem this to be a huge concern.
All in all, John Deere & Company appears to be as fundamentally sound as most would assume.
Deere & Company’s Lines of Business
While the stock is technically fair valued from a price to earnings perspective, the stock itself isn’t likely to see any more of the meteoric upside investors have enjoyed in recent history. The primary basis of our assuming this is simply derived from the stock’s price chart.
In March 2020, the stock bottomed out near $112 and is now trading near $382. This approximate 241% increase in a relatively short span of time is unlikely to happen again in the near future. However, assumptions aside, given the aforementioned financial strength and fortified industry position that Deere maintains, we believe the company will continue to deliver for its customers and shareholders (just not to as high a degree after its post-COVID launch).
It should also be understood that Deere & Co. operates in volatile business spaces (ie. manufacturing of commodities), creating lots of room for variables that could potentially negatively impact the lines of business they operate in and service. Some threats may include foreign exchange rates, interest rates, commodity prices, and even weather patterns!
All of these factors have the ability to alter (positively or negatively) their top and bottom lines.
Finally, there have been recent strike scares surrounding Deere, that have appeared to have subsided. Thankfully (from an investor standpoint), these fears have been allayed as agreements and ratifications have been made in contracts between the company and its employees.
In even more recent history, however, Deere has come under legal fire as it relates to antitrust issues involving the company. We don’t deem this a major issue, at least from our initial reading of the attached article, however, investors considering buying Deere stock should do their own due diligence and make sure they are comfortable with the potential legal risk the company could face going forward.
Additionally, also in recent history, hundreds of thousands of farmers appear to be unhappy with the company’s practices in regard to tractor repair. Again, it is essential that investors do their own research and due diligence before investing in the company’s stock.
Should you buy Deere & Company Stock?
Here is Deere & Company in a nutshell: strong financials, dominant (global) industry position, diversified sources of revenue, and a few somewhat manageable variables. This is one of the companies that is likely to stand the test of time, as it has since the 19th century.
While you shouldn’t be entranced by past upside and believe that you’ll achieve the same returns if you invested in the company’s stock today, you’ll likely be happy in 20 years that you bought shares in John Deere & Company.
We currently give the company a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed as or understood as professional or formal financial and/or investment advice. We are simply expressing our opinions regarding a publicly traded entity.