Deere & Company (NYSE: FROM) — one of the world's largest manufacturers of agricultural machinery. The company mainly manufactures products under the John Deere brand.. Beyond agricultural machinery, Deere & Company manufactures machinery for the forestry and construction industries.
About the company's business
Business Deere & Company is divided into three segments:
- Agricultural machinery.
- Forestry and construction machinery.
- Financial services.
Agricultural machinery. Main segment, which manufactures and sells a full line of agricultural and lawn equipment, as well as spare parts. For the convenience of shareholders, the company divides it into two more directions: sales of large agricultural machinery and small agricultural equipment.
Sales of large agricultural machinery include:
- large and some medium tractors;
- harvesters and machines for harvesting;
- loaders;
- tillage equipment, sowing, fertilization;
- other equipment.
To small agricultural equipment:
- medium and small tractors;
- hay harvesting equipment;
- forage machines;
- equipment for lawns and golf courses;
- other household utility vehicles.
Beyond John Deere, the company owns many other brands:
- Frontier, Kemper and Green Systems - attachments.
- Hagie and Mazzotti - sprayers.
- Monosem - seeders and cultivators.
- PLA - sprayers and seeders.
- King Agro - carbon spray booms.
Forestry and construction machinery. The second largest segment, which manufactures and sells a huge range of machines, used in construction, logging, earthworks and loading and unloading. Direction includes:
- excavators;
- crawler bulldozers;
- all wheel drive loaders;
- motor graders;
- articulated dump trucks;
- concrete pavers;
- surface miners;
- asphalt pavers;
- log loaders;
- harvesters;
- other cars.
The company manufactures its equipment under the brands:
- John Deere - construction and forestry equipment.
- Wirtgen, Vögele, Hamm, Kleeman, Benninghoven and Ciber - road construction machines.
- Waratah - attachments for forestry and others.
Financial services. This includes ensuring the work of the company's dealers - financing, sale of warranty service, as well as maintaining retail revolving accounts.
Revenue by segment in 2021, billion dollars
| Revenue | share | |
|---|---|---|
| Large agricultural machinery | 16,509 | 37% |
| Small Agricultural Equipment | 11,860 | 27% |
| Forestry and construction machinery | 11,368 | 26% |
| Financial services | 3,548 | 8% |
| Other | 0,739 | 2% |
Sales geography for 3 Quarter 2021, billion dollars
| Large agricultural machinery | Small agricultural equipment | Forestry and construction machinery | Financial services | Total | |
|---|---|---|---|---|---|
| USA | 1,995 | 1,753 | 1,559 | 0,605 | 5,912 |
| Canada | 0,253 | 0,153 | 0,285 | 0,162 | 0,853 |
| Western Europe | 0,566 | 0,679 | 0,455 | 0,027 | 1,727 |
| Central Europe and CIS | 0,398 | 0,117 | 0,241 | 0,010 | 0,766 |
| Latin America | 0,758 | 0,125 | 0,227 | 0,060 | 1,170 |
| The rest of the world | 0,368 | 0,385 | 0,308 | 0,038 | 1,099 |
Profit distribution
Deere & Company supports growing shareholder dividend payouts, the last five years, quarterly paying about a third of the earned net profit. Regarding the buyback of shares, then it is non-systemic. The number of shares during this time decreased slightly from 314 million securities to 310 million.
Financial results
Over the past six years, the company has shown strong financial results and average quarterly growth of 12%. Since 2016, the company's business has always generated profit, except for one case: in the first quarter of 2018, the company created a reserve in connection with the tax reform in the United States, due to which a one-time loss was recorded.
Deere financial results & Company, billion dollars
| Revenue | EBITDA | Net profit | net debt | |
|---|---|---|---|---|
| 2016 | 26,644 | 3,754 | 1,524 | 26,336 |
| 2017 | 29,738 | 4,869 | 2,159 | 26,591 |
| 2018 | 37,358 | 5,598 | 2,368 | 34,394 |
| 2019 | 39,258 | 6,107 | 3,253 | 37,156 |
| 2020 | 35,540 | 6,001 | 2,751 | 34,250 |
| 2021 | 44,024 | 9,652 | 5,963 | 35,790 |
Comparison with competitors
| EV / EBITDA | P / E | net debt / EBITDA | |
|---|---|---|---|
| Deere & Company | 15,25 | 18,68 | 3,71 |
| Caterpillar | 14,93 | 20,88 | 3,03 |
| AGCO Corporation | 14,67 | 19,46 | 1,61 |
| Oshkosh Corporation | 10,75 | 15,93 | −0,86 |
| Terex Corporation | 10,19 | 17,51 | 1,00 |
Forecast for 2022
Deere management & Company announces good outlook for 2022, according to which financial results will continue to grow at double-digit rates next year.
Demand growth in the agricultural machinery segment in the US and Canada is expected to 15%, in Europe and South America - 5%, and in Asia will remain virtually unchanged compared to 2021.
Increased demand will lead to the following results:
- Large agricultural machinery segment revenue to grow by 20-25%, and operating margin will remain at the level of the current year: 20—21%.
- Revenue of the small agricultural equipment segment will increase by 15-20%, and operating margin will slightly decrease to 16-17% against 17,2% in 2021.
Forestry & Construction Machinery Segment Also Expects Double-Digit Growth. Global demand for forest machinery will increase by 10-15%, while for construction equipment - only 5-10%. This will lead to an increase in financial results.: revenue next year will add 10-15%, and operating margin will be at the level of 13.5-14.5% against 13,1% in 2021.
In the financial services segment, management expects a slight decline in net income from $0.881 billion in 2021 to $0.870 billion.
Beyond segment forecasts, management announced its net profit forecast, effective tax rate and net cash flow from operating activities in 2022:
- Net profit next year will grow from 5.965 billion dollars to 6.5-7 billion dollars.
- The effective tax rate will be at the level of 25-27%.
- Net cash flow from operating activities will be $6-6.5 billion.
Arguments for
Position in the industry. Deere & Company is one of the world's largest companies in the engineering industry, whose equipment will be in demand in the medium and long term due to the Biden infrastructure plan and the growth of the world's population, which daily increases by 265 thousand people.
Dividend payments. The company supports growing dividend payments to shareholders and at the same time has a high potential for increasing them, since the profit distribution ratio for dividends is very low and equal to 30%, looking at average data from 2016, And 19%, if you take the last four payments.
Strong outlook for 2022. Management announced a great plan for 2022, for which the company expects, that its growth rate will remain double-digit: revenue will increase by 14% from $44 billion to $50 billion, and net profit - by 10-18% from $5.9 billion to $6.5-7 billion.
Arguments against
Strike. Business workers in Illinois, Iowa and Kansas have been on strike for four weeks since mid-October, demanding higher wages from Deere & Company. In mid-November, the company sent them a new six-year agreement., with which the majority of employees of the enterprise agreed, and the strike is over. However, the four-week shutdown could impact production results in the Q1 2022 report..
Debt load. Deere & Company is overburdened with debt, and if US rates go up, this will have a negative impact on the financial condition of the company.. At the moment, the net debt of the enterprise is 35.790 billion dollars., and the Net Debt / EBITDA multiplier is 3,71.
What's the bottom line?
The crisis of 2020 did not affect Deere's business much & Company: revenue in 2020 decreased by only 9%, EBITDA fell by 4%, which means, that new potential quarantine restrictions should not lead to a strong drop in financial results.
The company is suitable for both long-term, and short-term investors. The first will be pleased with the leading position in the industry, strong financial results and good profitability, and secondly, an excellent forecast for 2022.
