February 13, 2015 Deere & Company Current Recommendation Prior Recommendation Outperform Date of Last Change 12/09/2010 Current Price (02/12/15) $89.37 Target Price $94.00 NEUTRAL (DE-NYSE) SUMMARY Deere s adjusted earnings declined 13.3% year over year to $1.83 per share in the fourth quarter of fiscal 2014, impacted by less favorable product mix, lower shipment and production volumes and higher production costs. The company expects to be solidly profitable in fiscal 2015, on the back of its efforts to establish a more resilient business model. However, equipment sales are projected to decrease around 15% year over year in the fiscal and Agriculture and Turf equipment sales is also expected to decline as a result of weaker conditions in the global farming economy. However, improvement in nonresidential market will drive growth. Hence, we are reaffirming our Neutral recommendation on the stock with a target price of $94. SUMMARY DATA 52-Week High $94.53 52-Week Low $80.01 One-Year Return (%) 6.79 Beta 1.24 Average Daily Volume (sh) 2,429,564 Shares Outstanding (mil) 342 Market Capitalization ($mil) $30,565 Short Interest Ratio (days) 13.96 Institutional Ownership (%) 66 Insider Ownership (%) 8 Annual Cash Dividend $2.40 Dividend Yield (%) 2.69 5-Yr. Historical Growth Rates Sales (%) 11.6 Earnings Per Share (%) 24.2 Dividend (%) 17.0 using TTM EPS 10.4 using 2015 Estimate 16.2 using 2016 Estimate 16.7 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Growth Industry Mach-Farm Zacks Industry Rank * 29 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) 2013 7,421 A 10,913 A 10,010 A 9,451 A 37,795 A 2014 7,654 A 9,948 A 9,500 A 8,965 A 36,067 A 2015 5,432 E 8,076 E 7,653 E 7,438 E 28,599 E 2016 5,476 E 27,701 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Jan) (Apr) (Jul) (Oct) (Oct) 2013 $1.65 A $2.76 A $2.56 A $2.11 A $9.09 A 2014 $1.81 A $2.65 A $2.33 A $1.83 A $8.63 A 2015 $0.83 E $1.71 E $1.56 E $1.41 E $5.51 E 2016 $0.82 E $5.34 E Note: 2013 & 14 Quarterly figures will not add up due to rounding off. Projected EPS Growth - Next 5 Years % 8 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 1837, IL-based Deere & Co., is engaged in the production and distribution of agricultural and forestry equipment, construction equipment and engines worldwide. The company sells products in the U.S. and Canada through branch offices as well as through distributors and dealers for the resale of products internationally. Deere & Co. s credit subsidiary, John Deere Capital Corporation (JDCC) is one of the largest equipment finance companies in the U.S. with more than 2.4 million accounts. Deere currently reports operating results under three major business segments: Agriculture and turf segment (Approximately 73% of total revenue in fiscal 2014) manufactures and distributes a full line of farm equipment and related service parts including tractors, sugarcane harvesters, sprayers, irrigation equipment, and more. Moreover, it manufactures and distributes equipment, products and service parts for commercial and residential use, which includes tractors for lawn, garden mowing equipment, golf course equipment, and more. Construction and forestry division (18%) manufactures, distributes to dealers and sells at retail a broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. The products and services produced by this segment are marketed primarily through independent retail dealer networks and major retail outlets. The Financial Services (7%) primarily finances sales and leases by John Deere dealers for new and used agricultural, commercial and consumer, and construction and forestry equipment. It provides wholesale financing to dealers of the above equipments. It also provides operating loans, offers certain crop risk mitigation products and invests in wind energy generation. Other revenues (Approximately 2% of total revenue in fiscal 2014) primarily comprises of the Equipment Operations revenues for finance and interest income, and other income, net of certain inter-company eliminations. Equity Research DE Page 2
REASONS TO BUY Deere entered into an agreement to sell its crop insurance unit to West Des Moines, IA-based Farmers Mutual Hail Insurance Company on Dec 18, 2014. The crop insurance business unit of John Deere Financial comprises John Deere Insurance Company and John Deere Risk Protection, Inc. Deere has been involved in the crop insurance business for nine years. However, price declines and falling demand have made the business less profitable in recent years. Following the sale of the unit, Deere will continue to design, manufacture and offer technology, equipment and services in its precision agriculture offerings. Notably, effective risk management remains an important factor for the company s operations. The transaction is expected to close in the first quarter of the calendar 2015. In Sep 2014, Deere purchased Bauer Built Manufacturing in order to expand its portfolio of agricultural equipment and enhance its ability to serve larger farms in key markets globally. Further, in Dec 2014, the company acquired Sao Paulo, Brazil-based Auteq Telematica, which is an onboard software and computer company that also specializes in hardware support. The acquisition will provide Deere additional specialization in the sugarcane market. The data produced by onboard computers will help customers enhance the performance and productivity of sugarcane plantations. Even though Deere has fully acquired Auteq, the latter will continue to operate under the Auteq brand name. These steps supports further growth and add to the company s highly successful product lineup in the country. On Jan 2015, Deere announced workforce adjustments at several factories in Iowa and Illinois as the company continues to align the size of its manufacturing workforce to market demand for products. The actions include indefinite layoffs at five locations as well as an extended inventory adjustment shutdown at another factory. In addition, Deere declared that it has added new jobs at two locations that build construction and forestry equipment. The action will help the company to boost margins. Deere expects sales growth of turf and utility equipment in the U.S. and Canada to range from flat to up 5%, benefiting from general economic growth. The company foresees global sales for Construction & Forestry equipment to advance about 5% in fiscal 2015. The gain reflects further economic recovery and higher housing starts in the U.S. as well as sales increases outside the U.S. and Canada. The Architecture Billings Index (ABI) score was 52.2 for December, up from a mark of 50.9 in November. An ABI Index score above 50 implies an increase in billings. This suggests that the nonresidential market continues to improve, albeit at a modest pace. Global forestry sales are expected to hold steady with the attractive levels of 2014. Net income from Financial Services is estimated at be around $610 million for the full year. REASONS TO SELL Deere expects equipment sales to decrease around 15% year over year in fiscal 2015. For the first quarter of fiscal 2015, Deere projected a 21% decline from the year-ago period. Deere projected its net income to be $1.9 billion for fiscal 2015. Segment-wise, Deere estimated Agriculture and Turf equipment sales to decline 20% for fiscal 2015 as a result of weaker conditions in the global farming economy. Deere expects industry farm machinery sales in the U.S. and Canada to be to be down 25% to 30% for fiscal 2015. In Europe, sales are projected to be down 10% due to lower commodity prices and farm income as well as potential pressure on the dairy sector. Sales in the Commonwealth of Independent States are expected to deteriorate further, in part due to tight credit conditions. Sales in Asia are projected to be down slightly, with most of the decline centered in China. In South America, Equity Research DE Page 3
industry sales of tractors and combines are expected to decline by 10% year over year due to headwinds affecting agricultural producers. Deere is expanding its business globally; however growth opportunities may be impacted by greater political, economic and social uncertainty. Further, Deere operates in a variety of highly competitive global and regional markets. Aggressive pricing or other strategies pursued by competitors, unanticipated product or manufacturing delays could adversely affect Deere s business, results of operations and financial condition. RECENT NEWS Deere Beats Q4 Earnings, Down Y/Y on Slowdown in Farming Nov 26, 2014 Deere & Company s earnings per share in the fourth quarter of fiscal 2014 (ended Oct 31, 2014) declined 13.3% to $1.83 from $2.11 earned in the prior-year quarter impacted by less favorable product mix, lower shipment and production volumes and higher production costs. Earnings, however, beat the Zacks Consensus Estimate of $1.58, delivering an earnings surprise of 15.8%. Operational Update Deere s worldwide total sales dipped 5% year over year to $8.97 billion. However, revenues surpassed the Zacks Consensus Estimate of $7.76 billion. Net sales of equipment operations (which comprise Agriculture and Turf, Construction and Forestry) were $8 billion, down 7% year over year, including a price realization of 1%, offset by a 1% unfavorable impact from currency translation. Region-wise, equipment net sales were down 10% in the U.S. and Canada, and 2% in rest of the world. Cost of sales in the quarter decreased 3.7% year over year to $6.1 billion. Gross profit during the quarter was $2.87 billion, down 8% year over year. Selling, administrative and general expenses dipped 10% to $851 million. Operating profit declined 14% year over year to $1.17 billion. Operating income from equipment operations plunged 18% year over year to $910 million due to less favorable product mix, lower shipment and production volumes and higher production costs. Segment Performance The Agriculture & Turf segment sales decreased 13% year over year to $6.2 billion, as lower shipment volumes, sale of John Deere Landscapes and water operations and unfavorable currency translation partially offset price realization. Operating profit of the segment slumped 32% year over year to $682 million due to lower shipment and production volumes, less favorable product mix, higher production costs primarily related to engine emission programs, increased warranty costs and an impairment charge for Chinese operations. Construction & Forestry sales improved 23% year over year to $1.87 billion aided by higher shipment volumes and price realization, partially offset by unfavorable currency translation. Operating profit in the segment surged 93% year over year to $228 million, driven by higher shipment volumes and lower selling, administrative and general expenses. Net revenues at Deere s Financial Services operations were $762 million in the reported quarter, up 9% year over year. The segment s operating profit was $261 million, compared with $241 million in the prioryear quarter. Net income in this segment was $172 million compared with $157 million in the year-ago quarter. The improvement stemmed from growth in credit portfolio, partially offset by lower crop Equity Research DE Page 4
insurance margin, higher provision for credit losses and higher selling, administrative and general expenses. Fiscal 2014 Performance Deere posted earnings of $8.63 per share for fiscal 2014, down 5.1% from $9.09 a share in fiscal 2013. However, it came ahead of the Zacks Consensus Estimate of $8.38. Revenues for the full year decreased 5% year over year to $36.07 billion. However, it surpassed the Zacks Consensus Estimate of $33.07 billion. Weaker conditions in the global farming sector caused sales and earnings to decline in fiscal 2014 from the record results of 2013. Financials As of Oct 31, 2014, Deere had cash and cash equivalents of $3.8 billion versus $3.5 billion as of Oct 31, 2013. As of Oct 31, 2014, long-term borrowings were $24.4 million, compared with $21.6 billion as of Oct 31, 2013. Cash from operations for the twelve-month period ended Oct 31, 2014, were $3.53 billion, up 8% from $3.25 billion in the year-ago comparable period. Dividends and buybacks in 2014 totaled a record $3.5 billion. Looking Ahead In spite of continued pullback in the global agricultural sector John Deere expects to remain solidly profitable in 2015, reflecting its efforts to establish a more resilient business model. Deere expects equipment sales to decrease around 15% year over year in fiscal 2015. For the first quarter of 2015, Deere projected a 21% decline compared with the year-ago period. Deere projected its net income to be $1.9 billion for fiscal 2015. Segment-wise, Deere estimated Agriculture and Turf equipment sales to decline 20% for fiscal 2015 as a result of weaker conditions in the global farming economy. Region-wise, industry farm machinery sales in the U.S. and Canada are expected to be to be down 25 to 30% for 2015. In Europe, sales are projected to be down 10% due to lower commodity prices and farm income as well as potential pressure on the dairy sector. Sales in the Commonwealth of Independent States are expected to deteriorate further, in part due to tight credit conditions. Sales in Asia are projected to be down slightly, with most of the decline centered in China. In South America, industry sales of tractors and combines are expected to decline by 10% year over year due to headwinds affecting agricultural producers. Deere expects sales growth of turf and utility equipment in the U.S. and Canada to range from flat to up 5% benefiting from general economic growth. The company foresees global sales for Construction & Forestry equipment to advance about 5% for 2015. The gain reflects further economic recovery and higher housing starts in the U.S. as well as sales increases outside the U.S. and Canada. Global forestry sales are expected to hold steady with the attractive levels of 2014. Net income from Financial Services is estimated at around $610 million for the full year. Equity Research DE Page 5
VALUATION Deere s current trailing 12-month earnings multiple is 10.4x, compared with the 15.8x average for the peer group and 19.0x for the S&P 500. Over the last five years, shares of Deere have traded in the range of 9.0x to 20.5x trailing 12 month earnings. The stock is trading at 4% discount to the peer group based on forward earnings estimates. We are maintaining our Neutral recommendation on Deere, indicating that we expect it to perform in line with the market. Our target price is $94 or 17.1x 2015 EPS of $5.51. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Deere & Company (DE) 16.2 16.7 8.6 7.1 10.4 20.5 9.0 Industry Average 16.9 20.1 11.4 9.8 15.8 48.0 9.7 S&P 500 16.5 15.4 10.7 15.1 19.0 19.4 12.0 Kubota Corporation (KUBTY) 16.4 14.0 9.3 11.5 14.9 35.6 12.2 AGCO Corporation (AGCO) 16.4 16.4 8.6 6.2 10.4 27.6 7.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Deere & Company (DE) 3.4 6.2 2.8 31.0 2.7 2.8 7.4 Industry Average 1.7 1.7 1.7 11.5 0.6 1.0 6.3 S&P 500 5.3 9.8 3.2 25.5 2.1 Equity Research DE Page 6
Earnings Surprise and Estimate Revision History Equity Research DE Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of DE. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform - 15.3%, Neutral - 76.9%, Underperform 7.2%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research DE Page 8