Its agricultural fundamentals continue to be robust, and the company's order book position is also solid as per their latest earnings call. The growing demand and price realization are benefitting Deere’s construction and forestry business as well.
Deere has also been making significant investments in technology and expanding their capabilities with respect to digitization, automation, autonomy and electrification. All of these factors could make it an attractive growth opportunity and result in multiple expansion.
Market position and pricing power
Deere has a wide range of agricultural and construction products to offer its customers. The company has been the preeminent manufacturer of mission-critical agricultural equipment for over a century, earning its reputation as one of the world's most valuable brands. Their primary strategy is to provide farmers with complete, end-to-end solutions. Deere's cutting-edge products address every stage of the farming process, including field preparation, planting and seeding, chemical application and harvesting.
From guidance systems to seed placement and spacing to customized spraying applications, the company incorporates more and more technology into its products. It has developed one of the most recognizable brands globally, resulting in strong brand loyalty among farmers. Customers have consistently received dependable, high-quality products from the company, which has worked to lower the total cost of ownership.
The company has cemented its position as the market leader for agricultural equipment thanks to the strength of its brand and extensive dealer network. Their global dealer network provides customers with world-class products and value-added services. Its strong competitive positioning and high brand loyalty among farmers give it pricing power. They also have consistently produced best-in-class agricultural equipment for decades, resulting in the industry's largest installed base.
Deere’s agriculture equipment sales continue to grow as the company has a strong focus on offering a wide range of precision agriculture technologies. Some of the key names of Deere’s precision agriculture technologies include Autotrac, Section Control, ExactApply, ExactEmerge, TrueSet and Combine Advisor. These are digital technologies that provide real-time data and analytics services to the farmers that help them improve their overall cultivation efficiency, particularly the efficiency of the planting and harvesting processes.
Deere’s goal is to revolutionize the agricultural processes with technology and become a unique connection point between machines, people, technology and insights that help farmers produce better crop yields. A good example of the automated guidance provided by Deere’s offerings is their See & Spray application, which can be installed on a John Deere Sprayer. This app helps minimize costs through the optimal identification of weeds and spraying only at the points when they are detected. In this way, the company is commercializing its artificial intelligence and machine learning technologies in agriculture equipment and simplifying day-to-day agricultural processes.
Deere’s research is dedicated to increasing machine efficiency. Its installed on-field preparation tillage equipment can use guidance systems to reduce overlap in each machine pass, collect field conditions data and adjust the depth and down pressure maneuvers.
As some markets mature, the company will look to reduce the cost structure, providing an opportunity to rethink its footprint and create a leaner organization. The company is rolling out more and more new products and upgrading existing product models regularly over the last decade to increase machine efficiency.
Customers also rely on Deere's services, such as machine maintenance and access to the company's proprietary aftermarket parts, which is a good revenue stream. Deere is enabling its customers to use the company's digital applications to communicate with dealers, manage their fleet and track machine performance to determine when maintenance is required.
As we can see in the above chart, Deere’s stock has had a strong upward trajectory over the past year. The revenue performance of the company has been so solid that the stock price continued to rise despite various visible risks such as the price rises of key raw materials such as steel and the company’s heavy exposure to food-related commodity prices such as corn and grains, whose decline could materially affect their revenues.
Deere’s current enterprise-value-to-revenue multiple of 3.83 is exceptionally high for an industrial player, and so is its price-book ratio of 7.12, but the premium is stemming from the strong moat that the company has built as a result of its brand loyalty and market position. I believe that given this strong moat, Deere could qualify as a growth stock, though I would prefer to wait for a lower entry point.