Deere has exposure to end markets with attractive tailwinds

Business Strategy & Outlook

Deere offers customers an extensive portfolio of agriculture and construction products. It will continue to be the leader in the agriculture industry and one of the top players in construction. For over a century, the company has been the pre-eminent manufacturer of mission-critical agricultural equipment, which has led to its place as one of the world’s most valuable brands. Deere’s strong brand is underpinned by its high-quality, extremely durable, and efficient products. Customers in developed markets also value Deere’s ability to reduce the total cost of ownership. The company’s strategy focuses on delivering a comprehensive solution for farmers. Deere’s innovative products target each phase of the production process, which includes field preparation, planting and seeding, applying chemicals, and harvesting. The company also embeds technology in its products, from guidance systems to seed placement and customized spraying applications. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Deere and its dealers provide, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.

Deere has exposure to end markets with attractive tailwinds. In agriculture, demand for corn and soybeans will be strong in the near term, largely due to robust demand from China and tight global supplies. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s roads are in poor condition, which has led to pent-up road construction demand. Looking further out, the precision ag will be an incremental value driver for Deere. The company recently closed the precision ag loop (in terms of capabilities) with the introduction of its autonomous 8R tractor. The precision ag presents an over-$6 billion sales opportunity for the ag leader this decade.

Financial Strengths

Deere maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of fiscal 2022, coming in at 0.7. Total outstanding debt, including both short- and long-term debt, was nearly $10.6 billion. Deere’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of fiscal year-end 2022 stood at $3.7 billion on its industrial balance sheet. Deere’s ability to tap into available lines of credit to meet any short-term needs looks comfortable. Deere has access to $5.7 billion in credit facilities. Deere can generate solid free cash flow throughout the economic cycle. The company can generate $8 billion in free cash flow in the midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, management is determined to rationalize its footprint by reducing the number of facilities in mature markets. If successful, this will put Deere on much better footing from a cost perspective, further supporting its ability to return cash to shareholders. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $37 billion in fiscal 2022, along with $42 billion in finance receivables and $1 billion in cash. Deere enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

Higher crop prices encourage farmers to grow more crops and will lead to more farming equipment purchases, substantially boosting Deere’s revenue growth.
Deere will benefit from strong replacement demand, as uncertainty around trade, weather, and agriculture commodity demand has eased, encouraging farmers to refresh their machine fleet.
Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, benefiting Deere.

Company Description

Deere is the world’s leading manufacturer of agricultural equipment, producing some of the most recognizable machines in the heavy machinery industry. The company is divided into four reportable segments: production and precision agriculture, small agriculture and turf, construction and forestry, and John Deere Capital. Its products are available through an extensive dealer network, which includes over 1,900 dealer locations in North America and approximately 3,700 locations globally. John Deere Capital provides retail financing for machinery to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Deere product sales.

(Source: Morningstar)

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