Deere & Company (NYSE: DE) is the world's leading manufacturer of agricultural and forestry equipment. In FY 2007 Deere generated over $24.1 billion in revenue with an overall operating margin of 11.1%. The company also produces equipment used for construction, residential lawn care, commercial landscaping, and other consumer and commercial heavy equipment products. Perhaps best known by consumers for their lawn tractors, Deere's products also include harvesters, excavators, loaders, industrial sprayers, and utility vehicles.
More than 50% of Deere's revenue in FY2007 came from sales of agricultural equipment. Consequently, much of Deere's success hinges upon the success of the agriculture industry and crop prices. One current trend that may play to Deere's advantage is increased research in renewable energy sources that use ethanol, a chemical material typically derived from corn. Ethanol-based energy research and development over the next several years could cause a large growth in corn prices, leading to higher agricultural activity which would increase Deere's sales of farm equipment.
As of late, Deere has been looking to diversify away from the increasingly volatile domestic markets. The US housing market has been in turmoil for the past year and a half, and increasing foreclosure rates indicate that the last of the mis-allocations in the housing market are still surfacing. Deere has taken the opportunity to grow its international business, increasing equipment sales organically through South American and European farmers in order to catch profits from a greater demand for agricultural equipment internationally.
Deere & Company is one of the world's largest manufacturer of heavy machinery and is the leading producer of agricultural and forestry equipment. In addition to designing and manufacturing equipment, the company has a network of dealers and distributors that sell its equipment and utilize Deere's parts network. Also, Deere has an in-house credit department that allows customers to finance their purchases directly through Deere. The company is divided into four business segments:
Agricultural Equipment: This segment develops and manufactures farming equipment such as tractors, harvesters, balers, sprayers, utility vehicles and other machines. Deere is the world's leading producer of agricultural equipment.
Construction & Forestry Equipment: This segment is responsible for construction equipment such as excavators, bulldozers, and dump trucks as well as forestry equipment that includes feller bunchers, skidders, and knuckleboom loaders. Deere is the world's largest producer of forestry equipment.
Commercial & Consumer Equipment: This segment produces commercial and consumer landscaping equipment such as mowers, tractors, trimmers and other lawn care machinery. Deere also makes landscaping equipment designed for use on golf courses.
Financial Services: Deere's financial services department provides clients with the opportunity to finance their purchases. Deere's financial services segment operates at a very high margin, contributing to only 8% of total revenue, but over 20% of total operating income.
|Segment||Revenue (mm)||% of Total Segment Revenue||Operating Income||% of Total Segment Operating Income||Segment Operating Margin||Revenue Growth (Decrease) from 2007|
|Construction & Forestry||$5,035||20.9%||$571||33%||13.9%|
|Commercial & Consumer Equipment||$4,333||17.9%||$304||9%||5.7%||11.8%|
Note: Total revenue and operating income is greater than the sum of all segments' revenue and operating income because there is a smaller amount of revenue and profit generated through parts and interest that is not associated with any segment.
In 2007, Deere's Agricultural Equipment segment generated over $12 billion in sales, more than 50% of Deere's total revenue for fiscal 2007. One of the most important trends affecting the agriculture industry at the moment is research into biofuels such as ethanol, which are chemical fuels derived from plants. One of the most prominent crops used in biofuels is corn, which accounts for nearly all ethanol in North America.
The USDA anticipates ethanol production to top 12 billion gallons annually by 2016, derived from over 4 billion bushels of corn. This would represent an increase of 168% from the estimated 1.6 billion bushels of corn used in ethanol production in 2005. Such a large increase would be accompanied by significantly higher corn prices, which would combine with the increased production to result in more revenue for farmers. Due to the increased demand for corn and higher prices, many farmers would use their increased income to make large investments such as purchasing new farm equipment like tractors and harvesters, thus benefiting companies like Deere.
Deere has ridden the biofuel boom quite well and it's stock value has risen 400% in the last four years in a nearly uninterrupted uptrend, without the volatility that might be seen in corn ethanol.
The US housing market is highly influential upon Deere's revenue, particularly in its Commercial & Consumer Equipment segment. Most sales from this segment come from sales of lawn tractors, mowers, and other landscaping and yardwork equipment. When the housing market thrives, consumers purchase and commission the construction of new homes, and many decide to purchase lawn mowers to care for their own yards or hire landscaping services.
When the housing market heats up, Deere sells more equipment and generates more revenue and profit. When the housing market falters, consumers cut back on unnecessary expenditures such as landscaping services and are less likely to make relatively large purchases such as mowers and other lawn care machinery, the prices for which can reach into the thousands of dollars. Recently the US housing market experienced a slight recession due in part to issues around subprime lending.
Internationally, Deere has been attempting to gain a stronger presence in markets throughout Western Europe where it faces stiff competition from CNH Global N.V. (CNH) and AGCO (AG) . Deere is also working to establish itself more firmly in emerging markets such as Brazil, India, China, and Russia.
Last year, Deere took steps towards enhancing its presence in these nations through building factories in Brazil and China, a technical and engineering center in India, and by solidifying its distribution and support network throughout Russia. Also, in June 2007, Deere announced plans to acquire Ningbo Benye, a small tractor manufacturer in China in hopes of better serving the needs to China's agriculture industry.
Deere is very well poised to benefit from the increased demand for its products from these emerging economies. Everything from its construction equipment used to build roads and cities to lawn tractors used in the backyards of newly built homes, would likely see increased sales. Thus, if Deere can successfully insert itself into these markets and use its size and brand reputation to compete with other manufacturers, Deere will experience significantly increased revenues in years to come.
Because of the range of products the Deere produces, the company faces a variety of competitors across the globe in different markets.
CNH Global N.V. (CNH): CNH is one of Deere's main competitors in the agricultural equipment market and the construction equipment industry. CNH is more diversified globally than Deere, with only 44% of sales coming from North America. CNH's next largest market is Western Europe, which represents 32% of its sales. Although Deere holds the agricultural equipment advantage over CNH, CNH is Deere's stiffest competition in the lucrative Western European market.
Caterpillar (CAT): Caterpillar is heavily involved in the forestry and construction equipment industries, generating nearly $42 billion in revenue in 2006. Caterpillar is Deere's largest competitor in the North American construction market, as 53% of CAT's sales come from North America, Deere's highest producing market. Caterpillar has experienced high growth in recent years, partly because of the multiple acquisitions the company has made, but also due to the booming energy market which requires the construction of new infrastructure. As the major player in the construction market, CAT has benefited greatly from the construction of new pipelines and other energy facilities.
AGCO (AG): AGCO is a main player in the agricultural equipment market. However, AGCO is not much of a competitor in North America as only 25% of its sales are generated in the US and Canada. AGCO represents tough competition as Deere tries to expand its business throughout Europe and the Middle East. About 70% of AGCO's revenue comes from the EMEA region (Europe, Middle East, Africa).
Toro Company (TTC): Toro competes with Deere in producing commercial and consumer equipment such as mowers, tractors and other landscaping-related machinery.
|Company||2006 Revenue (mm)||2005-06 Revenue Growth||Operating Income (mm)||Operating Margin||R&D Expenses||Main Industries/Markets||Agricultural Revenue as % of Total Sales|
|Deere||$24,082||8.7%||$2,675||11.1%||$726||Agricultural, Forestry, Commercial & Consumer||46%|
|CNH Global N.V. (CNH)||$15,964||22.8%||$830||5.2%||$367||Agricultural, Construction||60%|