Deere & Co (DE, Financial) experienced a daily loss of 2.64%, culminating in a 3-month loss of -1.29%. The Earnings Per Share (EPS) stands at 33.84. This raises the question: is the stock modestly undervalued? In the following analysis, we delve into the valuation of Deere (DE) to answer this question.
Company Introduction
Deere is the world's leading manufacturer of agricultural equipment, boasting some of the most recognizable machines in the heavy machinery industry. The company operates through four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. With a stock price of $400 and a GF Value of $519.17, Deere appears to be modestly undervalued. Let's delve deeper into the company's value, starting with its income breakdown:
Understanding the GF Value
The GF Value is a proprietary valuation model that considers historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line on our summary page provides a snapshot of the stock's fair value. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given its current price of $400 per share and a market cap of $115.20 billion, Deere (DE, Financial) appears to be modestly undervalued. As such, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength presents a higher risk of permanent capital loss. Therefore, it's crucial to review a company's financial strength before investing. Deere's cash-to-debt ratio of 0.12 is worse than 83.65% of 208 companies in the Farm & Heavy Construction Machinery industry. GuruFocus ranks Deere's overall financial strength at 5 out of 10, indicating fair financial strength.
Profitability and Growth
Companies with high profitability and consistent profitability over the long term are generally less risky investments. Deere has been profitable 10 times over the past 10 years and has a revenue of $60.40 billion and Earnings Per Share (EPS) of $33.84 over the past twelve months. Its operating margin is 23.15%, ranking better than 95.69% of 209 companies in the Farm & Heavy Construction Machinery industry. Overall, Deere's profitability is ranked 8 out of 10, indicating strong profitability.
Company growth is a crucial factor in valuation. GuruFocus research has found that growth is closely correlated with a company's long-term stock performance. The faster a company is growing, the more likely it is to be creating value for shareholders. Deere's 3-year average annual revenue growth rate is11.8%, ranking better than 66.5% of 203 companies in the Farm & Heavy Construction Machinery industry. The 3-year average EBITDA growth rate is 18.6%, ranking better than 67.78% of 180 companies in the same industry.
ROIC vs WACC
Another way to determine a company's profitability is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Deere's ROIC is 14.16, and its WACC is 8.09.
Conclusion
In conclusion, Deere (DE, Financial) stock appears to be modestly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 67.78% of 180 companies in the Farm & Heavy Construction Machinery industry. To learn more about Deere stock, you can check out its 30-Year Financials here.
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