Nothing Runs Like John Deere's Share Price
Investors have been rewarded for holding Deere shares in recent years.
Be sure to like and subscribe to never miss a post like this one! At the time of writing this, I have no position in DE. This is not financial advice and is meant to serve as an overview of John Deere’s business.
The world needs food!
Deere has strength in all three of their business segments, with tailwinds propelling earnings.
Demand outpaces supply as demand for food grows and Congress passes $1.2 trillion infrastructure bill.
Planting the Seed
The world needs food. It’s a simple thought, and maybe a glaringly obvious way to start this article off, but it is true. The demand for food is only going to keep growing, with projections showing that we will need to increase food production output by 68% by 2050. As this article from Forbes argues, we have to find new ways to become more efficient when producing food, while also taking the environmental impact in to consideration. We can’t keep expanding farm land, instead we have to better use what land we have.
This is where John Deere comes in. Deere is in the business of creating innovative agricultural equipment to help farmers become more efficient and output more crop. This is going to be vital as the world’s population continues to grow, giving Deere a massive opportunity to be the leader of more sustainable and more efficient farming. Let’s take a look at John Deere DE 0.00%↑, whose share price is up 147% in 5 years.
John Deere’s Business Overview
Deere separates its business into four segments: Production and Precision Agriculture, Small Agriculture and Turf, Construction and Forestry, and Financial Services.
The Production and Precision Agriculture segment “defines, develops, and delivers global equipment and technology solutions to unlock customer value for production-scale growers of large grains, small grains, cotton, and sugarcane”. This segment involves the design, manufacturing, and sale of mid-size and large tractors, combines, soil preparation equipment, seeding equipment, and crop care equipment. To summarize, this segment sells the equipment farmers use to grow, maintain, and harvest their crops.
The Small Agriculture and Turf segment “defines, develops, and delivers global equipment and technology solutions to unlock customer value for dairy and livestock producers, high-value drop producers, and turf and utility customers”. This segment’s products include mid-size and small tractors, hay and forage equipment, riding and commercial lawn equipment, golf course equipment, and utility vehicles. Think of this segment as the one that produces those green riding mowers you may have seen before, and the segment responsible for keeping golf courses looking green and well-maintained.
The Construction and Forestry segment “defines, develops, and delivers a broad range of machines and technology solutions to unlock customer value on job sites, including earthmoving, forestry, and roadbuilding production systems”. This segment’s products include crawler dozers and loaders, four-wheel-drive loaders, excavators, skid-steer loaders, milling machines, and log harvesters. If you are like me and have no idea what most of those are, these are used in construction, often the machines being used when you’re stuck in traffic for hours due to construction.
Finally, the Financial Services segment “primarily finances sales and leases by Jone Deere dealers of new and used production and precision agriculture, small agriculture and turf, and construction and forestry equipment”. This is very similar to Caterpillar’s financial services segment, which finances the purchase of their products. The products Deere sells are often very expensive purchases, and offering financing on these products is a part of their business.
Competitors to John Deere include AGCO Corporation, Kubota Tractor Corporation, The Toro Company, Hitachi Construction Machinery, Volvo Construction Equipment, and Caterpillar.
In the U.S. and Canada, Deere owns and operates 22 factory locations while leasing another 2 locations. Outside of the U.S. and Canada, they own or lease and operate 47 factories.
Quick Look at Financials
In the 2022 fiscal year, the Production and Precision Agriculture segment had net sales of $22 billion, a 33% increase from 2021. Operating profit for this segment in 2022 was 19.9%, slightly lower than the 20.2% in 2021. This is their largest business segment, representing 42.3% of net sales.
The Small Agriculture and Turf segment rang in net sales of $13.381 billion, a 13% increase from 2021 and 25.7% of net sales. Operating margin came in at 14.6%, less than the 17.2% in 2021.
Construction and Forestry checked in with $12.534 billion of net sales, a 10% increase from 2021, representing 24.1% of all net sales. Operating margin came in at 16.1%, up from the 13.1% margin in 2021.
The Financial Services segment had revenue of $4.085 billion in 2022, an 8% increase from 2021, representing 7.9% of all sales and revenues. Net Income was $880 million for 2022, down slightly from 2021.
Taking a quick look at the balance sheet, it is very healthy. Cash and marketable securities comes in at $5.508 billion, much lower than the $8.745 billion in 2021, but this is due to the investments they are making in their products, which we will talk about next. Net cash provided by operating activities in 2022 was $4.699 billion, lower than past years due to significant changes in their Trade, notes, and financing receivables relating to sales (fancy way of saying accounting related cash flows). Total debt is just under $9 billion, and with almost $8 billion of that being long term debt, combined with healthy cash flows, debt is no concern for John Deere.
Demand Outpacing Supply
Deere is a story of demand outpacing supply, especially in agriculture and construction. The agriculture segment will see increased demand for crops such as soybeans and corn as China reopens, along with continued tightness in the overall food commodity market, leading to continued spending to replace old equipment for farmers. For the construction business, the $1.2 trillion infrastructure passed in Congress will be a major tailwind for earnings in this segment.
Their more consumer-facing business in small agriculture and turf may see slowdowns as consumer spending slows, but changes in this segment may be overlooked due to strength in their other businesses.
Deere Moving Forward
John Deere has a strong advantage over their competitors in terms of innovation. Deere has always been considered a leader of innovation in the segments, helping farmers become more efficient, grow more crops, and waste less in the process. Deere is pushing forward with autonomous tractors that use AI and mapping with cameras to perform its tasks, freeing up farmers to complete other critical tasks on the farm that need to be done. Deere is also pushing to electrify their product line and reduce CO2 emissions in the agriculture industry, a major emitter of CO2.
Deere’s share price has been on an incredible run for a long time now, so it is impossible to speculate where it will be in any set of time. That being said, from a business standpoint there is nothing to worry about with John Deere. Cash flow is excellent, research & development costs are steady but significant as to progress to their goals as mentioned before, and they have wide economic moats in the segments they operate. Deere’s future is as green as their tractors.
Didn't get around to adding my thoughts Sunday but this was an excellent report! $DE is one of my dividend positions currently, with the expectation that the company can continue to grow and grow its dividend.