! May 30, 2012 IME Deere & Company Ticker: DE Recommendation: Hold Current Price: $75.78 Implied Price: $83.94 Investment Thesis !Key Statistics !52 Week Price Range 50-Day Moving Average ! ! $61.05-$88.55 $75.14 Estimated Beta 1.84 Dividend Yield N/A Market Capitalization 3-Year Revenue CAGR $34.1 billion ! ! By 2050, there will be 20 billion increases in global population. It indicates the expected stronger food demand, which transfers to the demand for John Deere’s agricultural equipment. John Deere increasingly invests in their global expansion, 7 new product factories will be added in the next few years to add capacities to respond strong demand. Along with other effective strategies like product transition will help Deere remain competitive in the global market. Due to achieving continuous record quarters of sales and profits, John Deere’s operation and management are proven to be effective and expected to have promising growth in the next several years. 50.10% Deere & Company Trading Statistics Diluted Shares Outstanding 402 million Average Volume (3-Month) 3.77 million Institutional Ownership Insider Ownership Five-Year Stock Chart 65.10% 6.18% EV/EBITDA 9.08x Margins and Ratios Gross Margin 35.97% EBITDA Margin 14.67% Net Margin 7.89% Debt to Enterprise Value Current Ratio 51.13% 4.52x Covering Analysts: Grace Gong Gong !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 University of Oregon Investment Group! ! University of Oregon Investment Group May 30, 2012 Business Overview A blacksmith and inventor – John Deere founded Deere & Company in 1837, while the Present Company was incorporated under laws of Delaware in 1958. In 1848, the company, which is still a growing plow business at that time, moves to Moline, Illinois. The headquarters has stayed there since then because Moline offers waterpower and transportation advantages. The history of the company consists of people, places and products that reflect their core values – integrity, quality, commitment and innovation. Since 1837, John Deere has been experiencing many changes, which also come with opportunities: ! ! ! ! ! ! ! ! In 1863, the company made the first Deere implement adapted for riding – Hawkeye Riding Cultivator. In 1912, the modern Deere & Company emerges and its shares started to be listed in New York Stock Exchange. During 1984 - 2000, Deere acquired Farm Plan Corporation, an agribusiness financier; Funk Manufacturing Company, maker of powertrain components; SABO, a European maker of lawn mowers; Homelite, a leading producer of handheld outdoor power equipment; and Timberjack, a world-leading producer of forestry equipment. In 2001, a record number of products are introduced to strengthen Deere's global competitive position. John Deere Landscapes is formed through acquisitions of McGinnis Farms and Century Rain Aid. In 2005, John Deere invests in wind energy projects in the rural United States and establishes a new wind energy business unit managed by John Deere Credit. In 2007, Deere & Company completes its acquisition of LESCO, Inc., a leading supplier of lawn care, landscape, golf course and pest control products. John Deere is chosen by Ethisphere magazine for its list of the World's 100 Most Ethical Companies. In 2010, Research and development expense tops $1 billion for the first time. Deere is the first company to ship construction machines with above 175-horsepower engines certified to meet rigorous U.S. Interim Tier 4 emissions standards. In 2011, Deere is listed among the 50 most-admired companies by Fortune magazine and ranked as one of the 100 best global brands by a leading brand-consulting firm. The company acquired the remaining 61% ownership interest in A& I Products, Inc. Deere & Company (the Company) and its subsidiaries (collectively called John Deere) operate in three major business segments – the agriculture and turf segment, the construction and forestry segment and financial services segment. The first two segments sometimes are grouped as “equipment operations”, whose products and services are marketed primarily through independent retail dealer networks and major retail outlets. In addition, the last segment is referred as “financial services operations”. The Agriculture and Turf Segment (A&T: 70%) !"#$%&'(')'*&%"&+',%-./0%'1-%/ This segment manufactures and distributes a full line of farm and turf equipment and related service parts including large, medium and utility tractors, loaders, seeding and application equipment, hay and forage equipment, turf and utility equipment, integrated agricultural management system technology, precision agricultural irrigation equipment and supplies, landscape and nursery products, and other outdoor power products. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 2 University of Oregon Investment Group May 30, 2012 The major tractors include: ! 5 Series Tractors (epitome of the word “utility”) ! 6 Series Tractors (efficiency and comfort) ! 7000 Large-Frame Series Tractors ! 8R/8RT Series Tractors ! 9000 Series Tractors The Construction and Forestry Segment (C&F: 21%): This segment primarily manufactures and distributes a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. Examples include various loaders, excavators, motor graders, articulated dump trucks, log harvesters and related attachments. The Financial Services Segment (FS: 8%): !"#$%&'2'304+/%$./"04'1-%/ This segment’s main duty is to finance sales and leases by John Deere dealers of new and used agriculture and turf equipment and construction and forestry equipment. Additionally, it also provides wholesale financing to dealers of the foregoing equipment and operating loans, finances retail revolving charge accounts and offers crop risk mitigation products and extended equipment warranties. Other Revenues (1%) Finally, there is small part of the revenues, which primarily include the equipment operations’ revenues for finance and interest income. Strategic Positioning !"#$%&'5'!0%&+/%6'1-%/'7'5589':0-;&% John Deere welcomes its 175th anniversary after the “Year of Exceptional Achievement” 1. The company has been famous for its outstanding performance since it was founded in 1837. In 2011, Deere reported income of $2.8 billion and the net sales and revenues of $32.0 billion, which surpassed previous high by a wide margin – a 50% increase and a 23% increase, respectively. In addition, all the business segments reported a sharp growth in profit in relation to 2010. Besides delivering record financial results, the company has maintained conservative capital expenditures, encouraged innovation, strengthened their commitment to responsible corporate citizenship, and continues to be a wellrespected employer. Engineering and Research John Deere has invested heavily in engineering and research to improve the quality and performance of its products, to develop new products, and to comply with government regulations for operating in a global market. Such expenditures were $1,226 million in 2011, $1.052 million in 2010 and $977 million in 2009, which were 4.2%, 4.5% and 4.7% of net sales, respectively. Manufacturing In the United States and Canada, the equipment operations own and operate 19 factory locations and lease and operate 4 locations, which contain roughly 27.1 million square feet of floor space. Fifteen of those factories are mainly used for producing A&T equipment and three are devoted to C&F equipment. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 John Deere 2011 Annual Report !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 3 University of Oregon Investment Group May 30, 2012 Outside the U.S. and Canada, the company’s equipment operations own or lease and operate equipment factories and assemblies throughout the world including: ! A&T equipment factories in Brazil, China, France, Germany, India, Israel, Mexico, the Netherlands, Russia and Spain; ! A C&F assembly operation in Russia, and equipment factories in Brazil and China. Patents and Trademarks John Deere owns a large number of patents, trade secrets, licenses and trademarks related to the company’s products and services that are expected to grow to further the competitive position. Patents are generally important but not regarded as a deciding factor to any of its businesses. However, certain John Deere trademarks including the “John Deere” mark, the leaping deer logo, the “Nothing Runs like a Deere” slogan and green and yellow equipment colors considered an integral part of John Deere’s business. Their loss could have a material adverse influence on John Deere. Marketing In the United States and Canada, the equipment operations distribute equipment and service parts through two A&T equipment sales and administration offices in Olathe, Kansas and Cary, North Carolina and one sales branch in Grimsby, Ontario; and one construction, earthmoving, material handling forestry equipment sales and administration office in Moline, Illinois. In addition, equipment operations operate a centralized parts distribution warehouse with 8 regional parts depot and distribution centers. Through these U.S. and Canadian facilities, John Deere markets products to 2,496 dealer locations for both A&T and C&F equipment – mostly independent owned. Certain lawn and garden product lines are sold through The Home Depot and Lowe’s. Outside the U.S. and Canada, John Deere A&T equipment is sold to distributors and dealers for resale in over 100 countries . ! Sales and administrative offices in Argentina, Australia, Brazil, China, France, Germany, India, Italy, Mexico, Poland, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, Ukraine and the United Kingdom ! Centralized parts distribution warehouses in Brazil, Germany and Russia ! Regional parts depots and distribution centers in Argentina, Australia, China, India, Mexico, South Africa, Sweden, and the United Kingdom. By consistently encouraging innovations, keeping product quality and taking advantages of its global presence and brand effect, John Deere “remains wellpositioned to capitalize on growth economy and, long term, to benefit from broad economic trends that hold great promise for the future”2. Business Growth Strategies John Deere has been poised for growth and future success, which determines its main business growth strategies – global expansion, continuing emphasis on U.S. and Canada markets and new product development. Global Expansion !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 2 John Deere 2011 Annual Report !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 4 University of Oregon Investment Group May 30, 2012 John Deere, especially its A&T segment, seeks to increase their market share in the emerging and high potential international markets. In addition, C&F segment has joint ventures with companies in its target markets including Bell Equipment Limited in North, Central and South America; Hitachi Construction Machinery Co. in Asia, Xuzhou Bohui Science & Technology Development CO. ltd in China and Ashok Leyland Limited in India. Furthermore, in 2011, Deere announced to build seven factories in markets that are important to its growth. Three of those new facilities for construction, equipment, engines and large farm machinery are located in China. One for the manufacture of farm tractors is in India as well as one for seeding, tillage and application equipment will be built in Russia. Besides building new facilities, the Equipment Operation’s manufacturing strategy also includes increasing levels of technology and automation, and the flexibility to add more capacities and accommodate the product design changes required to meet market conditions.3 Achieve growth in U.S. and Canada In 2011, U.S. and Canadian region accounted for 60% of the total revenue, 70% of total profit and over half the spending on capital programs. The main strategy to continue the success in this region is to investing in U.S. manufacturing base. In 2011, the facilities in Davenport, Des Moines and Waterloo were upgraded. In addition the company added about 2,500 employees to its U.S. workforce. New Product Development Another essential part of John Deere’s growth plans is expanding the product range and entering attractive portions of the market4. In 2011, John Deere has introduced a record number of products such as premium combines and its largest-ever self-propelled sprayers, which mostly feature improvements in power, comfort and performance. Those new products also aim to reduce emissions to customer requirements for power and efficiency. As a result, John Deere has receive many technology-related honors in 2011 including five silver metals presented at Europe’s largest farm equipment show and a gold medal earned at an international competition in France. Additionally, the John Deere 7280R was named tractor of the year by European farm-magazine editors. Influential factors to John Deere’s Growth For A&T segment, seasonality and general agricultural economy greatly affect the sales of equipment. For example, due to seasonality, the demand of turf and utility equipment in the second and third quarter is usually higher that in the rest of the year. Therefore, the company has set their production and shipment schedules corresponding to this seasonal pattern. In addition, when farmers have more income and costs associated with farming are lower, the demand will be higher and it benefits the cost reduction of producing the equipment. As a result, the company can generate more sales. For C&F segment, the prevailing levels of residential, commercial and public construction and condition of the forest products influences the sales significantly, because they determines the demand for the equipment produced under this segment. Additionally, the other factors include the general economic conditions, certain commodity like pulp and paper prices affecting the sales as well. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3 4 John Deere 2011 10-K John Deere 2011 Annual Report !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 5 University of Oregon Investment Group May 30, 2012 Furthermore, for overall Equipment Operation Sales, currency exchange rates respected to U.S. dollars and interest rates can have material influence on the sales due to the increasing portion of sales in the international markets. Industry Overview John Deere’s A&T segment is in tractors & agricultural machinery manufacturing industry. Firms in this industry manufacture agricultural machinery and equipment and powered home lawn and garden equipment. The main agricultural equipment includes tractors, harvesting and seeding machinery, and other machinery. 5 In order to be successful in this industry, companies are required to meet emission standards, invest in research and development of new products, have effective quality control, maintain guaranteed supply of key inputs and quickly adopt new technology. In addition, C&F segment operates in construction machinery manufacturing industry. Firms in this industry make construction machinery and equipment for use in residential, non-residential, highway, street and other infrastructure construction. 6 To have outstanding performance in this industry, companies have to obtain the latest available technology and techniques, establish export markets, increase both quantity and quality of the products and maintain a multiskilled and flexible workforce. Macro factors The major demand determinants for the tractors & agricultural machinery manufacturing industry include farm income, direct government payments, commodity prices, crop yields, replacement demand and seasonality. For example, when the farm income is high, farmers will increase their investments in machinery to generate more income. Alternatively, the availability of credit can also affect the demand in this aspect, because farmers will buy more machines if they can borrow money easily. In addition, the ages and operating costs of the old equipment affect the demand. For instance, if the equipment is out-of-date and costs a lot to operate, farmers will intent to replace it by new equipment, which will increase the demand. Furthermore, seasonality is another important factor causing the fluctuation in demand during the year. Thus, setting appropriate production and shipping schedule is essential to meet the seasonal demand for agricultural equipment sales. Secondly, the factors that influence the demand in construction machinery manufacturing industry are mainly interest rates, government spending on new infrastructure and repairs, business profitability and household disposable incomes. Particularly, the first two factors have higher influences on the demand for heavy construction equipment, since it is basically used for larger projects like big infrastructure construction and repairs. On the other hand, the last two factors have greater impact on the demand for light construction machinery, since those machines are basically used in the household construction and relatively smaller projects. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 5 6 IBIS World IBIS World !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 6 University of Oregon Investment Group May 30, 2012 Competition For A&T segment, the biggest competitor is CNH Global NV, which has 11.6% market share in tractors and agricultural machinery manufacturing industry in U.S. comparing to Deere & Company’s 46.2% market share. John Deere keeps its leading position in this industry by possessing solid customer base due to the long history, diversity in product lines (both machines and data management systems), advance in technology (telematics system) and strength in producing large size agricultural equipment (tractors over 100 horsepower). On the other hand, CNH Global NV, located in IL as well, is the world’s second-largest manufacturer of agricultural equipment, which makes it the direct competitor with A&T operating segment of John Deere. CNH has the strength in significant global presence and put heavy investments on research and development, which can help it stand out but not comparing to Deere & Company. Other indirect competitors include AGCO Corporation (3.9% market share), Lindsay Manufacturing Company (!1% market share) and Alamo Group Inc. (!1% market share), which mostly have their own focus but lack of global presence and large capital. For C&F segment, Deere’s (7.2% market share) major competitor is Caterpillar Inc., who owns 35.3% market share in construction machinery manufacturing industry in United States. Caterpillar’s large company size and outstanding strategic planning that react to the changes in business environment has helped the company lead the whole industry. For example, by seeing the potential high growth in the emerging market like China, Caterpillar has stepped ahead of other competitors to get in the market and possesses the market share by providing a wide range of services. Unlike Caterpillar, Deere entered the global market by partnering with other firms to increase manufacturing efficiency particularly licensing and supply agreements with domestic companies in the target markets. Additionally, the other competitors include Komatsu Ltd. (4.7% market share), Terex Corporation (3.2%) and CNH Global NV (2.6%) and Doosan Corporation (3.2%), which have the lack of global presence and resistivity to recessions as Caterpillar and Deere do. Management and Employee Relations *-<$&='>?'@==&4 A-<&+'B?'!"&=; Samuel R. Allen – Chairman and CEO since February 2010 After joining John Deere in 1975, Allen had been working in positions of increasing responsibility in the Consumer Products Division, Worldwide Construction & Forestry Division, John Deere Power System, and the Worldwide Agricultural division including managing operations in Latin America, China & East Asia and Australia. Additionally, Allen is also the Chairman of Council on Competitiveness as of January 2010 and was appointed to Whirlpool Corporation’s board of director’s in June 2010. James M. Field – Senior VP and CFO since June 2009 Mr. Field is responsible for advising the CEO and division presidents on major financial and strategic growth issues, and for managing Deere & Company’s worldwide financial and planning functions. In addition, he is also in charge of business planning and development, investor communications, and enterprise information technology. Before joining in Deere, he was working at Deloitte & Touche as a CPA. Now he is a member of Illinois CPA society and the American Institute of CPA. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 7 University of Oregon Investment Group !%-4.&+'C?'D<&%+04 May 30, 2012 Frances B. Emerson – VP, Corporate Communications and Global Brand Management Frances B. Emerson is responsible for a broad range of external internal, and brand management communications activities, as well as community relations and philanthropy. Before coming to Deere, she served as associate instructor of business and technical communications at the University of Arizona and associate instructor in University of Utah. Furthermore, she is the author of college textbook Technical Writing, published by Houghton Mifflin. Moreover, she completed the advanced program for Directors offered by the Harvard School of Business. Management Guidance After having the record year 2011, John Deere’s management has strong confidence in the future growth of their equipment operations due to recovering global economy, increasing farm income, stronger governmental supports outsides U.S. and Canada, increasing commodity prices. In order to effectively respond the strong demand for both A&T and C&F equipment in the next few years, the company has strategically expanded their global presence by opening new factories to add capacities, developing new products and modifying existing product mix by increasing product variety. However, there are also costs associated with expansion and product development including but not limit to higher R&D expenses, SG&A expenses, capital expenditures and unfavorable currency translation. In addition, due to the higher raw material cost and engineemission requirements, there will be more costs associated with production and capital expenditures incurred at least in the recent years. Specifically, the management estimates that the net sales will go up by 15% including 4-point price realization and 3-point unfavorable currency translation, which remains the same with the previous forecast. In addition, they projected net sales to increase by 15% in second quarter of 2012 compared to that of 2011, which the actual increase in 13%. Furthermore, as the management announced, John Deere will expand globally with mainly focuses on large-size tractors and develop combines to meet higher quality and emission requirements. In the recent annual industrial conference, John Deere’s CFO mentioned that they became the No.2 in combines business and No. 3 in tractor business in China, which shows their success in global expansion execution. On the other hand, as they predicted, the SG&A expense, R&D expense and material costs and freight increased by 5%, 18% and $185 million dollars in the second quarter of 2012 compared to the same quarter of 2011. Therefore, though the company attempts to be optimistic about their future growth, their estimates are relatively reasonable. As a result, John Deere is expected to have promising future growth because of strong demand, additional capacities and increasing global expansion with the considerable costs associated with generating higher revenues in the recent years Recent News Deere Posts Record Second-Quarter Earnings of $1.056 billion7 May 16, 2012 ! Earnings per share rise 23% on 12% increase in net sales and revenues. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 7 John Deere Website !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 8 University of Oregon Investment Group May 30, 2012 ! ! Healthy global farm conditions performance, support positive outlook. Full-year earnings forecast boosted to $3,350 billion John Deere’s chairman and CEO said, “John Deere is well on its way to a year of outstanding performance after reporting an eight consecutive quarter of recording earnings. Out results are a reflection of positive conditions in a global farm economy, which is continuing show impressive strength and endurance. Deere is gaining new customers throughout the world, who are responding with great enthusiasm to our innovative lines of equipment.” Deere Plans to Expand Manufacturing Capacity for Large Tractors8 March 1, 2012 Deere & Company announced that it would invest $70 million to expand the manufacturing capacity n its Waterloo, Iowa operations, where the company builds large farm tractors that are used around the world. David Everitt, the president of the Worldwide Agricultural & Turf Equipment division, said, “Through this initiative, we will increase our manufacturing flexibility and speed. The market demand John Deere has experienced for large agricultural equipment has remained strong several years. We believe the time is right to invest in our facilities to meet future demand for the large John Deere tractors that help our customers meet the world’s growing demand for food.” John Deere: Priced And Positioned for Success9 May 23, 2012 The demand for building and farming equipment has contributed to the success of Deere. Deere and Caterpillar, who are consistently working to create the most innovative products for consumers, dominate the industry. However, Deere has done an exceptional job at creating an integrated company that is able to provide equipment solutions for many types of customers. In addition, the extensive investments in new products and additional global capacity put Deere in a sound position to respond to a rising global need for food, shelter and infrastructure in the years ahead. Catalysts Upside ! ! ! Increasing global food demand driven by rapid population growth (20 billion global population in 2050) directly contributes to higher demand for agricultural equipment. Successes and continuing investments in global expansion primarily in emerging markets, new product development and product variation to maintain competitive position. Recovering farm economy reflected by stronger farmers’ confidence Downside ! ! ! Fluctuations in farm commodity prices affecting farmer’s income Uncertainty in general economic conditions influencing customers’ purchasing power of the company’s equipment Governmental monetary, imports and industrial related policies Comparable Analysis !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8 9 John Deere Website Seeking Alpha !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 9 University of Oregon Investment Group May 30, 2012 The comparable companies are first selected from the major player in the industry of John Deere’s each operating segment. Those who share the similar risk factors, operating segments and growth rate. Caterpillar Inc. (CAT 40%) Caterpillar Inc. is an Illinois-based multinational manufacturer of construction and mining equipment, diesel and natural gas engines and diesel-electric locomotives. The company was established in 1925, which now operates in 180 countries and employs 121,513 people globally. The reported segments include Construction Industries (32.4% of total revenue), Resource Industries (26.9% of total revenue), Power Systems (35.9% of total revenue) and Financial Product Segment (4.8% of total revenue). Caterpillar maintains a strategy of ongoing expansion into emerging markets in South America and Asia particularly in China where Caterpillar plans to launch lower-pried equipment. In addition, Caterpillar’s business is highly sensitive to global economic conditions and economic conditions in the industries and markets they serve, changes in governmental monetary or fiscal policies and commodity or component price increases. CNH Global NV (CNH 40%) Italy’s Fiat Group owns 90% of CNH Global NV, the world’s second-largest manufacturer of agricultural equipment and third largest maker of construction equipment. It was founded in 1999 through the merger of New Holland NV and Case Corporation with current headquarters in Burr Ridge, IL. The company has about 30,000 employees and produces attachments and loaders for tractors, commercial and residential mowers, harvesters, hay bales, planting and seeding equipment, sprayers, tillage equipment and tractors, which is sold through 12,000 dealers and distributors in 160 countries. Furthermore, the company has very similar operating segments as John Deere including Agricultural Equipment Segment (73.9% of total revenue), Construction Equipment Segment (20.2% of total revenue) and Financial Service Segment (8.5% of total revenue). The risks related to its business consist of global economic condition, risks associated with global expansion like currency transaction risks, and changes in the price of certain parts or commodities. Terex Corp. (TEX 20%) Terex Corporation manufactures capital goods machinery products worldwide. The company was founded in 1925 and based in Westport, Connecticut. There are five reported segments – AWP (Aerial Work Platforms 26.9% of total revenue), Construction (23.1% of total revenue), Cranes (30.7% of total revenue), MHPS (Material Handling and Port Solutions 9.5% of total revenue), MP (Material Processing segment 10.5% of total revenue) and Corporate and Other/Eliminations (-0.7% of total revenue). Terex operates a diverse portfolio of capital goods machinery businesses that serve numerous end-user applications and geographic markets. Mergers and acquisitions have played an important role in the industry of our company and will evaluate new opportunities that can enhance their business portfolio. Discounted Cash Flow Analysis !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 10 University of Oregon Investment Group May 30, 2012 In this discounted cash flow analysis, each line item is projected by the percentage of revenue. Beta The betas for John Deere and its comparable companies are regressed against S&P 500 weekly for 1 year, monthly for 3 years and monthly for 5 years. The final beta is the average of the 3 betas got for Deere and 3-year Hamada, 5-year Hamada, 3-year Vasicek and 5-year Vasicek, which is reasonable and a little lower than the comparable companies’ betas. Revenue Model There are mainly four parts of the revenue model – three operating segments discussed below and Other Revenues. The estimates are based on the management guidance, discussion in conference calls and changes in the macro environment and risk factors. Agricultural and Turf The sales revenues of the full line of farm and turf equipment worldwide primarily through independent retail dealer networks and major retail outlets are included in this segment. Construction and Forestry The sales revenue of the broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting mainly through retail dealers networks and major retail outlets are included in this segment. Financial Services The line mainly includes the income or loss by financing sales and leases by John Deere dealers of new and used equipment, and of wholesale financing. Other Revenues This part includes primarily the equipment operations’ revenues for finance and interest income and other income net of certain intercompany eliminations. Other income mainly includes revenues from services, insurance premium and fee earned and investment income. Capital Expenditure In 2012, Deere’s capital expenditure will mainly relate to Tier 4 emission requirements, the modernization and restructuring of key manufacturing facilities, the construction of new manufacturing facilities, and the development of new products. Future levels of capital expenditures are expected remain at least the same level for the next 5 years due to the new facilities needed for global expansion, additional capacities to meet stronger demand, investments in new products to maintain the leading position in each industry. Cost of Sales The costs are associated with the cost to manufacturing the equipment such as raw material, labor, overhead, shipping and handling costs and impairments. Since the price of raw materials is expected to increase by the management, cost of sales increases roughly at the same rate as the revenue. Inventories According to the conference calls, the management announces that Deere is in the middle of product transition, which they are making more combines. As a !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 11 University of Oregon Investment Group May 30, 2012 result, their inventory level went down in the recent periods. Since they have not finished this transition process, their inventories in the next 2-3 years will increase really slowly. However, after that their inventories will increase at a normal pace due to additional capacities and completion of product transition. Research and Development Expense Expenses related to R&D include but not limited to spending in support of new products including designing and producing products. R&D expenses are expected to increase in the recent future because of the necessity to meet more stringent emission requirement and to design different products fitting each region. Selling, Administrative and General Expense SG&A expenses include but not limited to the incentive compensation expenses, postretirement benefit costs, foreign currency translation and marketing expenses. Those expenses are projected to be higher due to the greater efforts needed to capture international market share and unfavorable currency translation. Depreciation and Amortization Expense The depreciation expenses of property and equipment, capitalized software and other intangible assets based on straight-line depreciation method are included in this part. However, expenditures for maintenance, repairs and minor renewals are generally expensed as incurred and not depreciable. Those expenses are expected to be higher due to management guidance. Interest Expense The interest expense is projected by the amortization schedule of long-term debt, which shows a large portion including all outstanding midterm notes, as about 75.3% of the total debt, will be paid off before 2019. In addition, the management states that the interest expense is expected to decrease due to lower average borrowing rates, partially offset by higher average borrowings. Other Operating Expense Other operating expenses mainly include depreciation of equipment on operating leases, cost of services and insurance claims and expenses. This expense increased in 2011 due to the write-down of wind energy assets classified as held for sale in 2010. Those expenses are projected to remain the same level in the future. Tax Rate The U.S. federal income tax rate is 35% and the company’s tax rate is projected to be lower because of R&D tax credit and tax rate on foreign activities. Recommendation Recommendation Comparable Analysis (50%) $ DCF Analysis (50%) $ Current Price $ Implied Price $ Under (Over) Valued $ 82.86 85.02 75.14 83.94 7.80 Due to the increasing global food demand and recovering farm economy, John Deere has promising opportunities of future growth. Based on the discounted cash flow analysis, which management guidance and various macro environmental factors are taken into consideration, the price of John Deere is undervalued by 13.15%. In addition, the comparable companies all have similar operational segments, are affected by similar risk factors and seek for global expansion, which make the comparable analysis useful for the overall analysis. As a result, by weighting discounted cash flow analysis and comparable analysis 50% and 50%, the implied price of $83.94 undervalued by $7.80 is a reliable !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 12 University of Oregon Investment Group May 30, 2012 estimate of Deere’s future position. However, since the company still faces potential negative impact of uncertainty in general economic condition, unfavorable currency translation and higher costs associated with global expansion, new product development and product modification to meet the emission requirements, Hold for Svigals’ portfolio is regarded as a wise choice. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 13 University of Oregon Investment Group May 30, 2012 Appendix 1 – Comparables Analysis Comparables Analysis ($ in millions) Stock Characteristics Current Price 50 Day Moving Average 200 Day Moving Average Beta Size Short-Term Debt Long-Term Debt Cash and Cash Equivalent Non-Controlling Interest Preferred Stock Diluted Basic Shares Market Capitalization Enterprise Value Profitability Margins Gross Margin EBIT Margin EBITDA Margin Net Margin Credit Metrics Interest Expense Debt/EV Leverage Ratio Interest Coverage Ratio Operating Results Revenue Gross Profit EBIT EBITDA Net Income Valuation EV/Revenue EV/Gross Profit EV/EBIT EV/EBITDA EV/Net Income DE CNH CAT Deere & Company CNH Global N.V. 40.00% $75.14 $39.76 79.96 43.07 77.52 41.36 1.84 2.69 TEX Caterpillar Inc. 40.00% $89.94 100.43 102.19 1.93 Terex Corp. 20.00% $16.93 21.72 19.90 3.33 8,484.00 8,626.00 950.00 0.00 0.00 239.72 9,531.11 25,691.11 10,762.00 25,191.00 2,864.00 25.00 0.00 652.34 58,671.28 91,785.28 243.30 2,365.20 973.20 1.10 0.00 110.40 1,869.07 3,505.47 34.29% 15.61% 18.49% 8.63% 25.95% 10.40% 12.53% 5.28% 31.70% 13.47% 17.61% 8.37% 17.87% 3.69% 5.66% 0.80% $772.00 0.67 6.52 3.25 $749.00 0.51 4.64 8.06 $772.00 0.67 6.83 3.25 $1,249.00 0.39 3.23 8.90 $132.40 0.74 6.52 3.02 $34,682.36 10,339.02 4,288.12 5,531.16 2,549.30 $20,002.00 5,191.00 2,081.00 2,506.00 1,056.00 $32,659.80 11,197.70 5,099.60 6,038.80 2,819.10 $20,002.00 5,191.00 2,081.00 2,506.00 1,056.00 $63,170.00 20,025.00 8,509.00 11,122.00 5,289.00 $7,067.80 1,263.10 260.60 399.80 56.50 1.19x 4.37x 11.94x 9.16x 29.08x 1.28x 4.58x 12.35x 8.77x 24.33x 1.68x 4.90x 10.76x 9.08x 19.46x 1.28x 4.95x 12.35x 10.25x 24.33x 1.45x 4.58x 10.79x 8.25x 17.35x 0.50x 2.78x 13.45x 8.77x 62.04x Max $89.94 100.43 102.19 3.33 Min $16.93 21.72 19.90 1.84 Weight Avg. $55.27 61.74 61.40 2.51 Median $39.76 43.07 41.36 2.69 11,120.20 25,191.00 3,388.30 25.00 0.00 652.34 58,671.28 91,785.28 243.30 2,365.20 950.00 0.00 0.00 110.40 1,869.07 3,505.47 7,747.06 13,999.84 1,720.24 10.22 0.00 378.90 27,654.77 47,691.65 8,484.00 8,626.00 973.20 1.10 0.00 239.72 9,531.11 25,691.11 11,120.20 16,924.00 3,388.30 1.50 0.00 401.83 30,193.51 54,850.91 34.29% 15.61% 18.49% 8.63% 17.87% 3.69% 5.66% 0.80% 26.64% 10.29% 13.19% 5.62% 25.95% 10.40% 12.53% 5.28% $1,249.00 0.74 6.83 8.90 $132.40 0.39 3.23 3.02 $834.88 0.57 5.33 5.46 $63,170.00 20,025.00 8,509.00 11,122.00 5,289.00 $7,067.80 1,263.10 260.60 399.80 56.50 1.68x 4.95x 13.45x 10.25x 62.04x 0.50x 2.78x 10.76x 8.25x 17.35x !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 14 University of Oregon Investment Group May 30, 2012 Appendix 2 – Discounted Cash Flows Analysis Discounted Cash Flow Analysis ($ in millions) Total Revenue % YoY Growth Cost of Sales % Revenue Gross Profit Gross Margin Selling, Administrative and General % Revenue Depreciation and Amortization % Revenue Research and Development % Revenue Other Operating Expense % Revenue Earnings Before Interest & Taxes % Revenue Interest Expense % Revenue Earnings Before Taxes % Revenue Less Taxes (Benefits) Tax Rate Net Income Net Margin Add Back: Depreciation and Amortization Add Back: Interest Expense*(1-Tax Rate) Operating Cash Flow % Revenue Current Assets % Revenue Current Liabilities % Revenue Net Working Capital % Revenue Change in Working Capital Capital Expenditures (PP&E) % Revenue Acquisitions % Revenue Unlevered Free Cash Flow Discounted Free Cash Flow Q1 Q2 Q3 Q4 2008A 2009A 2010A 2011A 01/31/2012A 04/30/2012E 07/31/2012E 10/31/2012E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 28438 23112 26005 32013 6767 10009 9940 9234 35950 38815 41774 44690 47703 50845 54143 56780 58951 60719 -18.73% 12.51% 23.10% -21.43% 47.92% -0.70% -7.10% 12.30% 7.97% 7.62% 6.98% 6.74% 6.59% 6.49% 4.87% 3.82% 3.00% 18744 15352 16484 21005 4333 6674 6878 6297 23916 25773 27738 29540 31341 33354 35464 37134 38554 39710 65.91% 66.42% 63.39% 65.61% 64.03% 66.68% 69.20% 68.20% 66.53% 66.40% 66.40% 66.10% 65.70% 65.60% 65.50% 65.40% 65.40% 65.40% $9,694 $7,761 $9,521 $11,008 $2,434 $3,335 $3,061 $3,121 $12,033 $13,042 $14,036 $15,150 $16,362 $17,491 $18,679 $19,646 $20,397 $21,009 34.09% 33.58% 36.61% 34.39% 35.97% 33.32% 30.80% 33.80% 33.47% 33.60% 33.60% 33.90% 34.30% 34.40% 34.50% 34.60% 34.60% 34.60% 2960 2781 2987 3169 709 870 755 720 4116 3834 4217 4639 5103 5614 6175 6177 6140 6134 10.41% 12.03% 11.49% 9.90% 10.48% 8.69% 7.60% 7.80% 11.45% 9.88% 10.09% 10.38% 10.70% 11.04% 11.40% 10.88% 10.42% 10.10% 831 873 915 915 243 246 229 203 883 850 830 815 820 1068 1191 1306 1303 1214 2.92% 3.78% 3.52% 2.86% 2.87% 2.46% 2.30% 2.20% 2.46% 2.19% 1.99% 1.82% 1.72% 2.10% 2.20% 2.30% 2.21% 2.00% 943 977 1052 1226 313 352 348 342 1354 1456 1546 1609 1670 1729 1787 1817 1827 1822 3.32% 4.23% 4.05% 3.83% 4.62% 3.52% 3.50% 3.70% 3.77% 3.75% 3.70% 3.60% 3.50% 3.40% 3.30% 3.20% 3.10% 3.00% 698 718 748 716 177 255 276 224 932 815 1199 1292 1364 1444 1527 1584 1627 1548 2.45% 3.11% 2.88% 2.24% 2.61% 2.55% 2.78% 2.43% 2.59% 2.10% 2.87% 2.89% 2.86% 2.84% 2.82% 2.79% 2.76% 2.55% $4,262 $2,412 $3,819 $4,982 $992 $1,611 $1,453 $1,632 $4,747 $6,087 $6,244 $6,796 $7,405 $7,636 $8,000 $8,762 $9,500 $10,291 14.99% 10.43% 14.68% 15.56% 14.67% 16.10% 14.62% 17.67% 13.21% 15.68% 14.95% 15.21% 15.52% 15.02% 14.78% 15.43% 16.11% 16.95% 1137 1042 811 759 192 158 128 88 564 609 606 644 677 717 720 698 719 735 4.00% 4.51% 3.12% 2.37% 2.84% 1.58% 1.29% .95% 1.57% 1.57% 1.45% 1.44% 1.42% 1.41% 1.33% 1.23% 1.22% 1.21% 3125 1369 3007 4223 800 1453 1325 1544 4183 5477 5639 6152 6728 6919 7280 8063 8780 9556 10.99% 5.92% 11.56% 13.19% 11.83% 14.52% 13.33% 16.72% 11.64% 14.11% 13.50% 13.77% 14.10% 13.61% 13.45% 14.20% 14.89% 15.74% 1111 460 1162 1424 266 485 459 526 1431 1904 1888 1984 2234 2296 2417 2685 2915 3153 35.56% 33.60% 38.63% 33.71% 33.26% 33.34% 34.60% 34.05% 34.21% 34.77% 33.49% 32.25% 33.20% 33.18% 33.20% 33.30% 33.20% 33.00% $2,014 $909 $1,846 $2,799 $534 $969 $867 $1,018 $2,752 $3,573 $3,750 $4,168 $4,494 $4,623 $4,863 $5,378 $5,865 $6,402 7.08% 3.93% 7.10% 8.74% 7.89% 9.68% 8.72% 11.03% 7.66% 9.20% 8.98% 9.33% 9.42% 9.09% 8.98% 9.47% 9.95% 10.54% 831 873 915 915 243 246 229 203 883 850 830 815 820 1,068 1,191 1,306 1,303 1,214 733 692 498 503 128 105 84 58 371 398 403 436 452 479 481 466 480 492 3,577 2,475 3,258 4,217 906 1,320 1,179 1,279 4,007 4,820 4,983 5,419 5,767 6,170 6,535 7,150 7,649 8,109 12.58% 10.71% 12.53% 13.17% 13.38% 13.19% 11.86% 13.85% 11.15% 12.42% 11.93% 12.13% 12.09% 12.14% 12.07% 12.59% 12.97% 13.36% 24,648 24,280 28,720 30,565 32,085 34,357 34,221 35,649 35,649 37,515 39,810 41,964 44,173 46,218 48,404 50,080 51,051 52,461 86.67% 105.05% 110.44% 95.48% 474.17% 343.26% 344.29% 386.07% 99.16% 96.65% 95.30% 93.90% 92.60% 90.90% 89.40% 88.20% 86.60% 86.40% 6,735 5,594 6,830 8,091 7,083 8,961 8,676 7,952 7,952 8,605 9,232 10,015 10,647 11,394 12,085 13,008 13,187 13,534 23.68% 24.20% 26.26% 25.27% 104.68% 89.53% 87.28% 86.12% 22.12% 22.17% 22.10% 22.41% 22.32% 22.41% 22.32% 22.91% 22.37% 22.29% $17,913 $18,687 $21,890 $22,474 $25,002 $25,396 $25,545 $27,697 $27,697 $28,909 $30,578 $31,949 $33,526 $34,824 $36,319 $37,072 $37,864 $38,927 62.99% 80.85% 84.18% 70.20% N/A N/A N/A N/A 77.04% 74.48% 73.20% 71.49% 70.28% 68.49% 67.08% 65.29% 64.23% 64.11% $773 $3,204 $584 $2,528 $395 $149 $2,151 $0 $1,213 $1,669 $1,371 $1,577 $1,298 $1,495 $753 $792 $1,063 349 322 319 537 269 155 127 99 650 740 802 894 840 830 815 800 790 780 1.23% 1.39% 1.23% 1.68% 3.98% 1.55% 1.28% 1.07% 1.81% 1.91% 1.92% 2.00% 1.76% 1.63% 1.51% 1.41% 1.34% 1.28% 252.30 49.80 45.50 61 0 0 0 0 0 0 0 0 0 0 0 0 0 0 .89% .22% .17% .19% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% - $ 1,329.59 $ (309.82) $ 3,036 $ (1,891) $ 771 $ 903 $ (971) $ 3,357 $ 2,868 $ 2,512 $ 3,155 $ 3,350 $ 4,043 $ 4,224 $ 5,597 $ 6,066 $ 6,266 $ 751 $ 857 $ (899) $ 710 $ 2,394 $ 1,891 $ 2,142 $ 2,051 $ 2,233 $ 2,105 $ 2,515 $ 2,459 $ 2,290 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 15 University of Oregon Investment Group May 30, 2012 Appendix 3 – Revenue Model Revenue Model ($ in millions) Agriculture and turf net sales % Growth % Revenue Construction and forestry net sales % Growth % Revenue Financial services revenues % Growth % Revenue Other revenues % Growth % Revenue Total Revenue % Growth $ $ $ $ $ 2008A 20,985 27.54% 73.79% 4,818 -4.31% 16.94% 2,190 4.58% 7.70% 445 -10.82% 1.56% 28,438 18.09% $ $ $ $ $ 2009A 18,122 -13.64% 78.41% 2,634 -45.33% 11.40% 2,028 -7.40% 8.77% 328 -26.29% 1.42% 23,112 -18.73% $ $ $ $ $ 2010A 19,868 9.63% 76.40% 3,705 40.66% 14.25% 2,074 2.27% 7.98% 358 9.15% 1.38% 26,004 12.51% $ $ $ $ $ 2011A 24,094 21.27% 75.26% 5,372 44.99% 16.78% 2,163 4.29% 6.76% 384 7.26% 1.20% 32,013 23.11% Q1 01/31/2012A $ 4,724 -14.96% 69.81% $ 1,395 -4.42% 20.61% $ 548 -1.73% 8.10% $ 100 -0.32% 1.48% $ 6,767 -21.42% Q2 04/30/2012E $ 7,735 63.74% 77.28% $ 1,611 15.48% 16.10% $ 561.15 2.40% 5.61% $ 102 2.00% 1.02% $ 10,009 47.91% Q3 07/31/2012E $ 7,700 -0.45% 77.47% $ 1,570 -2.55% 15.80% $ 570 1.50% 5.73% $ 100 -2.00% 1.01% $ 9,940 -0.70% Q4 10/31/2012E $ 7,000 -9.09% 75.81% $ 1,550 -1.27% 16.79% $ 583 2.30% 6.31% $ 101 1.20% 1.10% $ 9,234 -7.10% 2012E $ 27,159 12.72% 75.55% $ 6,126 14.04% 17.04% $ 2,261 4.55% 6.29% $ 403 4.98% 1.12% $ 35,950 12.30% 2013E $ 29,386 8.20% 75.71% $ 6,643 8.44% 17.11% $ 2,359 4.30% 6.08% $ 427 6.00% 1.10% $ 38,815 7.97% 2014E $ 31,737 8.00% 75.97% $ 7,131 7.34% 17.07% $ 2,460 4.30% 5.89% $ 446 4.40% 1.07% $ 41,774 7.62% 2015E $ 34,085 7.40% 76.27% $ 7,573 6.21% 16.95% $ 2,561 4.10% 5.73% $ 470 5.40% 1.05% $ 44,690 6.98% 2016E $ 36,540 7.20% 76.60% $ 8,003 5.67% 16.78% $ 2,663 3.97% 5.58% $ 498 6.00% 1.04% $ 47,703 6.74% 2017E $ 39,134 7.10% 76.97% $ 8,427 5.30% 16.57% $ 2,766 3.87% 5.44% $ 518 4.00% 1.02% $ 50,845 6.59% 2018E $ 41,952 7.20% 77.48% $ 8,789 4.30% 16.23% $ 2,864 3.54% 5.29% $ 539 3.90% 0.99% $ 54,143 6.49% 2019E $ 44,175 5.30% 77.80% $ 9,083 3.34% 16.00% $ 2,959 3.35% 5.21% $ 563 4.50% 0.99% $ 56,780 4.87% 2020E $ 45,942 4.00% 77.93% $ 9,375 3.21% 15.90% $ 3,052 3.12% 5.18% $ 582 3.50% 0.99% $ 58,951 3.82% 2021E $ 47,320 3.00% 77.93% $ 9,656 3.00% 15.90% $ 3,143 3.00% 5.18% $ 600 3.00% 0.99% $ 60,719 3.00% !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 16 University of Oregon Investment Group May 30, 2012 Appendix 4 – Working Capital Model Working Capital Model ($ in millions) Total Revenue Current Assets Receivables Days Sales Outstanding A/R % of Revenue Inventories Days Inventory Outstanding % of Revenue Total Current Assets % of Revenue Long Term Assets Net PP&E Beginning Capital Expenditures Depreciation and Amortization Net PP&E Ending Total Current Assets & Net PP&E % of Revenue Current Liabilities Payables to Unconsolidated Affiliates Days Payable Outstanding % of Revenue Accounts Payable and Accrued Expenses Days Charges Outstanding % of Revenue Deferred Income Taxes % of Revenue Total Current Liabilities % of Revenue Q1 Q2 Q3 Q4 2008A 2009A 2010A 2011A 01/31/2012A 04/30/2012E 07/31/2012E 10/31/2012E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E $28,438.00 $23,112.00 $26,004.00 $32,013.00 $6,767.00 $10,009.15 $9,939.53 $9,233.83 $35,949.51 $38,815.01 $41,773.71 $44,690.01 $47,703.46 $50,844.90 $54,143.02 $56,780.18 $58,950.78 $60,719.30 21606.00 21882.90 24349.10 27501.60 278.07 345.59 341.77 313.56 75.98% 94.68% 93.64% 85.91% 3041.80 2397.30 4370.60 3063.00 59 57 97 53 12.49% 9.85% 17.95% 12.58% 24647.80 2428020% 2871970% 3056460% 86.67% 105.05% 110.44% 95.48% 26406.80 28957.00 29011.00 32210.76 32210.76 33769.06 35716.53 37226.78 38735.21 40269.16 42069.13 43550.40 44389.94 45600.20 359.01 260.37 268.52 320.93 327.04 317.55 312.08 304.88 296.38 289.08 283.61 280.72 274.85 274.12 390.23% 289.31% 291.87% 348.83% 89.60% 87.00% 85.50% 83.30% 81.20% 79.20% 77.70% 76.70% 75.30% 75.10% 5677.70 5400.00 5210.00 3438.00 3438.00 3745.65 4093.82 4737.14 5438.19 5948.85 6334.73 6529.72 6661.44 6861.28 121 73 70 50 52 53 54 59 63 65 65 64 63 63 83.90% 53.95% 52.42% 37.23% 9.56% 9.65% 9.80% 10.60% 11.40% 11.70% 11.70% 11.50% 11.30% 11.30% 3208450% 3435700% 3422100% 3564876% $ 35,648.76 $ 37,514.71 $ 39,810.35 $ 41,963.92 $ 44,173.40 $ 46,218.01 $ 48,403.86 $ 50,080.12 $ 51,051.37 $ 52,461.48 474.13% 343.26% 344.29% 386.07% 99.16% 96.65% 95.30% 93.90% 92.60% 90.90% 89.40% 88.20% 86.60% 86.40% 4303.8 4212.6 4111.0 4006.8 3773.4 3663.4 3635.4 3714.2 3734.2 3496.5 3120.3 2614.4 2101.6 155.00 127.00 99.00 650.00 740.00 802.06 893.80 840.00 830.00 815.00 800.00 790.00 780.00 246.23 228.61 203.14 883.46 850.00 830.00 815.00 820.00 1067.74 1191.15 1305.94 1302.81 1214.39 4532.2 4127.7 3790.7 4352.3 4303.8 4212.6 4111.0 4006.8 3773.4 3663.4 3635.4 3714.2 3734.2 3496.5 3120.3 2614.4 2101.6 1667.2 $ 29,180.00 $ 28,407.90 $ 32,510.40 $ 34,916.90 $ 36,388.30 $ 38,569.57 $ 38,331.97 $ 39,655.58 $ 39,422.12 $ 41,178.07 $ 43,445.77 $ 45,678.14 $ 47,907.62 $ 49,714.49 $ 51,524.19 $ 52,694.51 $ 53,152.95 $ 54,128.66 15.94% 17.86% 14.58% 13.60% 537.73% 385.34% 385.65% 429.46% 10.50% 9.44% 8.70% 8.31% 7.83% 6.88% 5.76% 4.60% 3.56% 2.75% 169.20 55.00 203.50 117.70 113.50 134.00 149.60 121.00 121.00 163.02 192.16 214.51 238.52 254.22 281.54 295.26 288.86 255.02 3 1 5 2 2 2 2 2 2 2 3 3 3 3 3 3 3 2 0.65% 0.21% 0.78% 0.45% 1.68% 1.34% 1.51% 1.31% 0.34% 0.42% 0.46% 0.48% 0.50% 0.50% 0.52% 0.52% 0.49% 0.42% 6393.60 5371.40 6481.70 7804.80 6816.70 8677.93 8349.20 7664.08 7664.08 8267.60 8856.03 9608.35 10208.54 10931.65 11586.61 12491.64 12674.42 13054.65 125 128 144 136 145 117 112 112 117 117 117 119 119 120 119 123 120 120 24.59% 20.66% 24.93% 30.01% 100.73% 86.70% 84.00% 83.00% 21.32% 21.30% 21.20% 21.50% 21.40% 21.50% 21.40% 22.00% 21.50% 21.50% 171.80 167.30 144.30 168.30 152.80 148.90 176.80 166.90 166.90 174.67 183.80 192.17 200.35 208.46 216.57 221.44 224.01 224.66 0.66% 0.64% 0.55% 0.65% 2.26% 1.49% 1.78% 1.81% 0.46% 0.45% 0.44% 0.43% 0.42% 0.41% 0.40% 0.39% 0.38% 0.37% 6734.60 $ 5,593.70 $ 6,829.50 $ 8,090.80 $ 7,083.00 $ 8,960.83 $ 8,675.60 $ 7,951.98 $ 7,951.98 $ 8,605.29 $ 9,231.99 $ 10,015.03 $ 10,647.41 $ 11,394.34 $ 12,084.72 $ 13,008.34 $ 13,187.29 $ 13,534.33 23.68% 24.20% 26.26% 25.27% 104.67% 89.53% 87.28% 86.12% 22.12% 22.17% 22.10% 22.41% 22.32% 22.41% 22.32% 22.91% 22.37% 22.29% !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 17 University of Oregon Investment Group May 30, 2012 Appendix 5 – Discounted Cash Flows Analysis Assumptions Considerations Terminal Risk Free Rate Terminal WACC Avg. Industry Debt / Equity Avg. Industry Tax Rate Current Reinvestment Rate Reinvestment Rate in Perpetuity Implied Return on Capital in Perpetuity Terminal Value as a % of Total Implied 2013E EBITDA Multiple Implied Terminal Year Multiple Terminal Free Cash Flow Growth Rate 2.85% 10.87% 125.00% 30.04% (7.48%) 9.12% 32.90% 61.2% 6.9x 7.1x 3% Tax Rate Risk Free Rate Beta Market Risk Premium % Equity % Debt Cost of Debt CAPM WACC Discounted Free Cash Flow Assumptions Implied Price 33.00% Terminal Growth Rate 2.85% Terminal Value !"#$ PV of Terminal Value 7.00% Sum of PV Free Cash Flows 64.08% Firm Value 35.92% Total Debt 3.31% Cash & Cash Equivalents 15.72% Market Capitalization 10.87% Fully Diluted Shares Implied Price Current Price Undervalued 3.00% 81,970 29,199 18,500 47,699 16,924 3,388 34,163 402 $ 85.02 $ 75.14 13.15% Adjusted Beta Appendix 6 –Sensitivity Analysis 85 0.55 0.65 0.75 0.85 0.95 Implied Price Terminal Growth Rate 2.0% 2.5% 3.0% 3.5% 343.10 406.26 499.89 653.04 290.02 335.19 398.27 492.55 249.12 282.70 327.59 390.64 216.69 242.41 275.65 320.29 190.38 210.55 235.94 268.87 Undervalued/(Overvalued) Terminal Growth Rate 4.0% 948.89 648.79 485.70 383.38 313.29 !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 18 University of Oregon Investment Group May 30, 2012 Appendix 7 – Sources SEC Filings John Deere Investor Relations page John Deere Conference and Earning Calls IBIS World S&P Net Advantage Factset Yahoo! Finance !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!UOIG 19