John Deere Company (DE)
Industrial Goods
Farm and Construction Machinery
Themes
Agricultural Commodity Inflation: The Federal Reserve’s QE1 and QE2 policies have begun to put downward
pressure on the US Dollar. Due to low interest rates and federal stimulus, the dollar has begun to enter into a period of
relative weakness when compared to other currencies and commodities. This weakness will lead to higher agricultural
commodity prices, which will result in higher revenues and profits for farmers. As farmers begin to reap in higher profits,
they will look to reinvest their profits into higher end or newer farming equipment such as tractors, plow, tills, and
planters; all of which are manufactured and sold by John Deere.
Agricultural Tax Reform: As of September 1, 2010 the farming industry will be able to fully depreciate new
purchases of farming equipment from their income. This one-year accelerated depreciation allows for farmers to deduct
all farming equipment purchases (tractors, combines, trucks) from their income as a tax ride off. This reform was tucked
in as an addition to the extension of the Bush tax cuts. Many farmers have been holding off new equipment purchases
until the farming season starts in roughly mid-March in order to maximize the useful life of the equipment while still
taking advantage of the accelerated depreciation and the income tax deduction that comes with it. This tax deduction ends
on December 31st of 2011, so farmers only have this year to take advantage of this particular government tax break. We
believe that this deduction will cause an increase in farm equipment purchases, and as John Deere is the world’s leader in
farming equipment we believe that Deere will have better than expected earnings in the 2nd and 3rd quarter of their fiscal
year starting November 1st of 2010.
Company and Competitors in Sector (Publicly Listed)
Deere
$37.72B
Market Cap
$58.85B
Enterprise Value
1.5%
Dividend Yield
20.51
P/E
1.45
P/S
5.99
P/B
4.70%
ROA
33.58%
ROE
7.17%
Profit Margin
Caterpillar
$58.87B
$86.67
1.9%
30.48
1.58
6.04
3.14%
22.05%
5.21%
Financial Modeling Valuation (40/40/20)*
Forward P/E
EV/EBITDA
19.1
Current
15.50
Historic P/E
$5.45/share
2000-2010
14.21
EPS 2011
Median**
14.75
Projection
17
Target
Target
$104/share
40
$41.6/share
40
* Price Modeling Based on Date ($90.12/share)
**Weighted Median of Date
Created by Nathaniel Hoch and Greg Fox
$98/share
$39.2/share
Industry Leader (DE)
$58.87 (2)
$86.67 (2)
1.9% (2)
20.51 (1)
0.78 (3)
1.66 (3)
4.70% (1)
33.58% (1)
7.17% (1)
DCF
Cash on Hand 6,028,900,000
Discount Rate 0.75
Assumption
+ Commodity $
P/FCF
36.24
Target
20
$101/share
$20.2/share
Final
$101