Disclaimer: This analysis is not comprehensive and serves to provide only a basic informational framework on value investing analyses.
John Deere is the brand name of Deere & Company, an American corporation that manufactures agricultural, construction, and forestry machinery, diesel engines, drivetrains used in heavy equipment, and lawn care equipment.
According to Seeking Alpha, Deere was founded in 1837, and has since grown to become one of the largest manufacturers of agricultural and construction equipment in the world. Many of its products retail for several hundred thousand dollars and are mostly sold through its independent dealer networks.
Economic Moat: Strong Trusted Brand
- Deere dominates the U.S. and Canada’s $23.0-billion farming equipment market with a 60% share. (Source) As of 2018, Deere … is the largest agriculture machinery company in the world.
- “Deere’s strategy is to sell its machines with dealers who work so closely with farmers that they practically become partners. This locks in customers over several generations, essentially creating a network effect.” (qtd. from Profit Confidential)
Active in Reducing Cost & Driving Growth
- In September 2017, Deere & Company signed a definitive agreement to acquire Blue River Technology, which is based in Sunnyvale, California and is a leader in applying machine learning to agriculture. Blue River has designed and integrated computer vision and machine learning technology that will enable growers to reduce the use of herbicides by spraying only where weeds are present, optimizing the use of inputs in farming. (Source)
During my research (read: Google search) of Deere & Co, I discovered that Deere operates in an industry that is cyclical, and its sales of machinery and equipment are heavily dependent on crop prices and the average farmers’ income in general.
Over the last couple of years, it seems there has been bumper crops leading to excess supply which has driven down crop prices.
This has caused a buildup over its inventory because farmers aren’t buying as many machines and equipment as before.
Another issue facing Deere is its operating leases. Because of the slowing sales, many customers are instead opting for asset leases of Deere’s machinery and equipment (as seen from the below graph from the Motley Fool). However, as sales begin to pick up, operating lease growth has naturally slowed as well.
Many investors and pundits were concerned that once those leases expire, Deere would be left with a huge inventory of used equipment and machinery, contributing even further to the current inventory buildup.
However, in an earnings call, the company reassured investors that
“we largely get beyond that headwind that we’ve been experiencing with those 12 month leases. And we’d have significantly fewer as we go through the second half of 2017“
Moreover it seems that Deere is planning on tapping on the used equipment market to rid of its inventory in the near future.
In my opinion, Deere’s capable management and underlying business fundamentals are in pristine condition, and investors have little to worry about.
This is evidenced in the first quarter of 2018, where Deere had produced better-than-expected results – a 27% increase in sales. Furthermore, orders for large equipment have accelerated and its early-order program for combines has also seen healthy growth.
However, it is still wise for investors to stay alert to inventory volume changes, cash usage (especially after the acquisition of Wirtgen Group in Dec 2017) and CapEx changes.