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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
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$61.05-$88.55
$75.14
Estimated Beta
1.84
Dividend Yield
N/A
Market Capitalization
3-Year Revenue CAGR
$34.1 billion
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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
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University of Oregon Investment Group!
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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:
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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%)
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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.
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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
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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.
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John Deere 2011 Annual Report
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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
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! 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
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John Deere 2011 Annual Report
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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.
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John Deere 2011 10-K
John Deere 2011 Annual Report
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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.
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IBIS World
IBIS World
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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
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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.
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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.
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John Deere Website
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May 30, 2012
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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
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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
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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
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John Deere Website
Seeking Alpha
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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
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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
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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