Deere: In maintenance mode? Earnings Analysis

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Deere & Company (NYSE:DE) discussed its F3 Q2013 earnings recently; the company also announced a quarterly dividend of $.51 a share yesterday. Other competitors in the Producer Manufacturing Sector that have recently reported results include  Joy Global Inc. (NYSE:JOY) and Caterpillar Inc. (NYSE:CAT). This analysis of Deere & Company based on preliminary financial results for the quarter ended 2013-07-31 complements our Fundamental Analysis on Caterpillar, Inc. published today.

Deere & Company

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Our analysis is peer-based (list of peers at the end of this post) and is based on the company’s performance over the last twelve months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million) 2013-07-31 2013-04-30 2013-01-31 2012-10-31 2012-07-31
Revenues 10,009.9 10,913.5 7,421.4 9,791.6 9,590.4
Revenue Growth % (8.3) 47.1 (24.2) 2.1 (4.2)
Net Income 996.5 1,083.9 649.6 687.5 787.8
Net Income Growth % (8.1) 66.9 (5.5) (12.7) (25.4)
Net Margin % 10.0 9.9 8.8 7.0 8.2
ROE % (Annualized) 47.3 55.1 36.3 38.6 42.7
ROA % (Annualized) 6.8 7.7 4.7 5.0 6.0

Valuation Drivers

Deere & Company currently trades at a higher Price/Book ratio (3.8) than its peer median (2.8). Deere’s operating performance is higher than the median of its chosen peers (ROE of 42.8% compared to the peer median ROE of 15.6%) but the market does not seem to expect higher growth relative to peers (PE of 9.7 compared to peer median of 11.2) but simply to maintain its relatively high rates of return.

The company attempts to achieve high profit margins (currently 9.0% vs. peer median of 7.0%) through differentiated products. It currently operates with peer median asset turns of 0.7x. Deere’s net margin is its highest relative to the last five years and compares to a low of 3.8% in 2009.

Quarterly Net Margin Trend for Deere & Company (NYSE:DE)

Annual Net Margin Trend for Deere & Company (NYSE:DE)

Capital Investment Strategy

Deere’s annualized rate of change in capital of 10.2% over the past three years is less than its peer median of 14.3%. This below median investment level has also generated a less than peer median return on capital of 7.8% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.

Deere Peers

Deere & Company (NYSE:DE)’s analysis versus peers uses the following peer-set: Caterpillar Inc. (NYSE:CAT), Komatsu Ltd (OTCMKTS:KMTUY) (TYO:6301), Kubota Corp (OTCMKTS:KUBTY), CNH Global NV (NYSE:CNH), AGCO Corporation (NYSE:AGCO), PT UNITED TRACTORS (OTCMKTS:PUTKF) and Joy Global Inc. (NYSE:JOY).

Sector: Producer Manufacturing. Industry Group:Trucks/Construction/Farm Machinery

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This post was first published on the CapitalCube BlogDisclaimer