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WIKI ANALYSIS
Deere & Company (NYSE: DE) is the world's leading manufacturer of agricultural and forestry equipment by revenue. In FY 2008 Deere generated over $25.8 billion in revenue with an overall profit margin of 7.2%.[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 58% of Deere's revenue in FY2008 came from sales of agricultural equipment.[2] Consequently, much of Deere's success hinges upon the success of the agriculture industry and crop prices. Increased research in renewable energy sources that use ethanol, a chemical material typically derived from corn will benefit Deere. 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.
Deere has been looking to diversify away from the increasingly volatile domestic markets. The houseing market collapse negatively effects sales in Deere's Commercial & Consumer segment, whose sales declined 24% during the first half of FY 2009.[3] This sales decline have caused the company's revenues todecrease from $12 billion during the first two quarters of FY 2008 to $10.7 billion during the first two quarters of FY 2009; net income has also fallen from $1.1 billion in the first half of FY 2008 to $676 million in the first half of FY 2009.[3]
Deere has recently qualified for TALF credit, which means that the Federal Government will back $737 million of its recent loans. [4] The Company needs the liquidity in face of recent lay-offs affecting over 1000 of its hourly employees, which triggered a labor dispute with the United Auto Workers. [5]
Falling Commodity prices in 2009 combined with low durable demand have endangered Deere’s business outlook, resulting in a $300 million goodwill write down for the company in September, 2009. Look for agricultural commodity prices like corn and wheat to rise for this impairment to reverse.[6]
Business Overview
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 |
|---|---|---|---|---|---|---|
| Agricultural Equipment | $12,121 | 50.3% | $1,443 | 36% | 8.6% | 18.5% |
| Construction & Forestry | $5,035 | 20.9% | $571 | 33% | 13.9% | |
| Commercial & Consumer Equipment | $4,333 | 17.9% | $304 | 9% | 5.7% | 11.8% |
| Financial Services | $2,094 | 8.7% | $571 | 21% | 28.6% | 15.12% |
| TOTAL | '$24,082 | 100% | $2,426 | 100% | 11.0% | 8.1% |
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.
Trends and Forces
Biofuels Research
Deere's agricultural equipment sector will prosper if the nation has to harvest massive amounts of corn or soybeans to fuel its vehicles. It takes about 21 pounds of corn to make 1 gallon of ethanol, which would mean much more demand for Deere's tractors if corn based ethanol took off.
The demand for Ethanol and biofuels peaked in 2008 along with gas prices, only to falter in 2009. People only consume biofuels, it seems, when gas prices are extremely high. For instance, the Midwest has seen a 52% drop in ethanol consumption, with only a 3% drop in gasoline consumption. Ethanol is about 15-20% less efficient than gasoline, and studies have shown it needs to be about 40 cents cheaper per gallon to compete. [7] This implies that gas prices need to be relatively high for Deere to benefit from the biofuel trend.
And the biofuel trend might miss the point. New research done at UC Merced and published in the journal Science in May 2009 presents evidence that crops yield 81% more energy per unit area of land when it is burned to make electricity to power cars than when it is refined into ethanol.[8] Furthermore, greenhouse gas emissions from this "bioelectricity" are 100% lower per unit area of land than cellulosic ethanol.[9] Certainly, Deere would benefit from a switch to corn-based power, but not as much if that power does not require the excessive harvests that ethanol does.
It is also possible that Deere tractors will not be used to harvest biofuels in the future. In July, 2009, Exxon Mobil (XOM) entered a five-year, $600 million partnership with Synthetic Genomics Incorporated, to develop algae-based biofuels.[10] Algae grows in the ocean, where Deere equipment does not work very well.
Housing Market
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.
June 2009 housing data beat expectations, but renting is cheaper than owning in many parts of the country. [11] This means that the housing market has not yet recovered from its 2008 slump in Summer 2009. Watch the IShares Dow Jones U.S. Real Estate Index Fund (IYR) to monitor a potential real-estate recovery.
International Growth
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.
Competition
Deere operates in several industries, and competes with major players within those industries.
It primarily competes in the Tractors and Agricultural Machinery market along with Caterpillar (CAT), AGCO (AG), FIAT S.p.A. (F-MI), and Kubota (KUB). The following graph describes the market share of these major players as of 2009. Caterpillar and Deere are the major players in the US markets. [12]
Deere has more definitive dominance in Wholesale Farm, Lawn and Garden equipment within the United States, though it is a very fragmented market. Its major publicly traded competitors include CNH Global N.V. (CNH), Kubota (KUB), AGCO (AG).[12]
Finally, Deere competes in the construction machinery area, where it loses quite definitively to Caterpillar. It also competes with CNH Global N.V. (CNH), Komatsu, Terex (TEX), and a large number of private companies.[12]
References
- ↑ DE 2008 10K
- ↑ | Deere & Co. Annual Report 2008
- ↑ 3.0 3.1 Deere & Co. Q2 2009 Press Release
- ↑ Talf Loan Description
- ↑ on DE Layoffs
- ↑ on DE Write Down
- ↑ [http://news.yahoo.com/s/ap/20090714/ap_on_re_ca/us_farm_scene_e85_outlook | Yahoo News: Massive Ethanol Decrease in 2009]
- ↑ CNET: "Study: Bioelectricity bests biofuels on miles per acre"
- ↑ CNET: "Study: Bioelectricity bests biofuels on miles per acre"
- ↑ http://seekingalpha.com/article/149477-exxon-s-biofuel-bet?source=email SeekingAlpha: Exxon's Biofuel Bet]
- ↑ |Housing crash recovery indicators
- ↑ 12.0 12.1 12.2 [ http://www.reuters.com/finance/stocks/overview?symbol=DE.N |Reuters Research]
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