Why Invest in John Deere Stock?

John Deere , an inventor, and blacksmith , founded Deere and company in 1837 . The company was, however, incorporated in 1958 under the laws of Delaware and was initially in the plow business in 1858 with Moline, Illinois being its headquarters. The new headquarters proved to be vantage point for the company as there was ease in transportation and waterpower access (Rukes, 2002). The history of the company includes places, people, and products that highlight the core values of commitment, quality, innovation, and integrity.

Although steam tractors were incorporated into farming only in the 1860’s, Deere did not venture into tractors until 1918 when the company purchased Waterloo Boy Tractor Company. It is this purchase that put the company into the agriculture business. The company made further leaps by getting listed on the New York Stock Exchange in 1912. Between the years 1984 and 2000, Deere made a number of major acquisitions such as Farm Plan Corporation, Funk Manufacturing Company (involved in the making of powertrain components), Homelite, SABO (a European lawn mower company) and Timberjack (producer of forestry equipment) (Rukes, 2002). The company focused on expanding its portfolio and thus since 2001 it has continuously increased the number of products under its global wing. Further, the firm has also looked into the energy industry by investing in wind energy projects which are located in the rural United States (U.S) . This investment was made in 2005 and is managed by the John Deere Credit unit. In 2007, it made another strategic move by acquiring LESCO Inc. LESCO is hailed as strategic as it incorporates landscape, lawn care, pest control products, and golf course. Additionally, i n 2011, the company acquired 61% equity in A&I products.

The company has managed to get a number of accolade s and recognitions in its global business ventures. In 2007, John Deere was identified by Ethisphere magazine as part of the World’s 100 Most Ethical Companies. In 2010, Deere was hailed as the first company to ship construction machines that met U.S Interim Tier 4 emissions standards. Fortune Magazine , t he following year ranked t he company as one of the 50-most admired corporates . It also made it to the top 100 best global brands by one of the reputable brand consulting firms.

It is prudent to note that John Deere comprises of Deere & Company and its subsidiaries work within three major business areas . These are construction and forestry segment, agriculture and turf segment, and lastly financial services (Rukes, 2002). The first two segments ( construction and forestry , and agriculture and t urf ) are grouped as equipment operations. These operations are marketed through the company’s independent retail networks and key retail outlets . Lastly, the last segment comprises of the financial services operations.

Agriculture and T urf segment 

Under this segment, the company distributes and manufactures a number turf and farm equipment. Further, t he segment provides utility, large and medium tractors, hay and forage equipment, loaders, integrated agricultural management system technology et cetera. The compan y’s major selling products within this segment are:

Six Series Tractors (comfort and efficiency)

Five Series Tractors (high utility degree)

7000 Large-Frame Series Tractors

9000 Series Tractors

8R/8RT Series Tractors

The Construction and Forestry Segment 

This component makes up 21% of the company’s investment portfolio. It incorporates a variety of heavy machinery and service parts that are key in earth moving, construction, timber harvesting, and material handling. E xamples of these include excavators, log harvesters, motor graders, various loaders, articulated dump trucks and related attachments.

The Financial Services Segment 

This segment makes up 8% of the John Deere corporation ’s investments and businesses. It finances leases and sales by John Deere dealers touching on products within other segments. The financing is further extended wholesale , financing to dealers of the operating and equipment loans. The company also finances charge accounts, extended equipment warranties, and crop risk mitigation products.

Current Situation 

Financial Position 

According to the Deere website , the “net income attributable to Deere and company was $488.8 millio n for the third quarter ended July 31 st in comparison to such a quarter last year with $511.6 million for the same period in 2015” (Marketwatch, 2016). It is also prudent to note that according to the report , in the first nine months of the year , the net income linked to the company stood at $1.239 billion as compared to the same period in the year 2015 which posted $1.589 billion last year. Globally, the company performed poorly with the net revenues and sales decreasing by 11 percent for the third quarter at $6.724 billion. At nine mo n ths the decline stood at 9% or $20.124 billio n (Marketwatch, 2016). As for the equipment operations, the net sales were $5.861 billion for the quarter. The net sales for nine months further stood at $17.37 billion. This was in comparison to $6.84 billion and $19.843 billion for the same periods in 2015. The sales incorporated price realization of 2% for the year and quarter. The sales also suffered the negative currency exchange effect at 2% both annuall y and for the nine months periods. As for the regional markets of Canada and United States, the equipment net sales were negative decreasing by 13% year to date and 16% for the quarter (Marketwatch, 2016) . In o ther regions, the net sales posted a negative decrease for the quarter at 13% and for the first nine months at 7%. In the same regions, there were an unfavorable currency translation effects at 4% (for the quarter) and 6 % (for the first nine months).

The negative global performance in the third quarter highlights the global recession that has continued to affect agriculture in construction equipment markets. It is notable that in the third quarter all business es under Deere continued to post profit s as compared to the year 2015. The Agriculture and Turf division was the most profitable segment. The financial services segment performed exponentially well with the net income for the nine months at $357.9 million and $125.9 million in comparison to 2015’s net income at $153.4 million and $480 million in the same periods respectively (Marketwatch, 2016). The lower results associated with the quarter were mainly due to financing spreads that were less favorable. A higher provision for lease residual values and credit losses were other reasons for the low results. However, the current results in this segment were boosted by the crop insurance business sales.

Why Invest in Deere? 

Ratio Analysis 

John Deere represents a typical American company that has a rich history as well as commercial legacy. It carries one of the best financial returns in the American economy. Its return on equity as per the first quarter of 2016 stood at 25% in range. The company boasts a solid Return on Invested Capital (ROIC) which by the first quarter of 2016 stood at 6.30% as compared to 6.04% for the fiscal year ended in 2015. The importance of the ROIC shows how effectively a company increases its cash flow relative to the capital that the said company has put into the business (Doran & Wright, 2007).

C urrently, Deere generates higher returns on investment than the cost it incurs to raise for investment capital. Deere thus is earning excess returns given that currently, the return on invested capital stands at 5.29% (Marketwatch, 2016). This translates to the value of the company increasing due to the positive excess returns associated with the new future investments. The ROIC thus posits a positive future for any individual looking at Deere as a prospective company to invest in (Doran & Wright, 2007). The Return On Equity (ROE) at Deere is arrived at by dividing the net income by the established average shareholder equity. As per the financial records, the company’s annualized ROE was said to be $1,981 million. The shareholder equity for the same period was $6.877million. Ultimately, this means that Deere’s ROE in the first quarter of 2016 was 28.80% (Marketwatch, 2016). This indicates a minor increase from the 2015 annual ROE. It is a common financial knowledge that ROE is desirable if it falls between 15% to 20%. The ROE indicates how effectively the company uses the funds to ensure that there is substantial growth in terms for shareholders. However, in the calculation of the ROE the net income used is the one which is linked to the common shareholders.

The liquidity ratios at John Deere are also critical pointers to any interested investor. The liquidity ratios are three in number; current ratio, cash ratio, and quick ratio. The current ratio points to a company‘s ability to meet its short-term obligations. This ratio is obtained by dividing Total Current Assets with Total Current Liabilities. As per the first quarter of 2016, the current ratio at John Deere was 2.10 (Marketwatch, 2016). It was fundamental to note that in the ten years the highest current ratio attained was 2.82, and the lowest was at 1.55. This ratio highlights the company’s capability in its operations or its capability to convert its product within its various segments into cash. Currently, John Deere uses its finance segment to fund leases and dealers. This means that if the liabilities are not paid off in good time, the liquidity of the company may be affected hence making it an unattractive investment venture (Doran & Wright, 2007).

The quick ratio, on the other hand, is used to effectively pinpoint a company’s total amount of cash, accounts receivable , and marketable securities with its amount of current liabilities . This ratio is known as the acid test ratio. Just like the current ratio , it points to a company’s ability to meet its liabilities and still operate effectively (Doran & Wright, 2007). The current quick ratio at John Deere is 0.43 meaning that the company meets 0.43$ for every 1$ liability. The cash ratio on the other hand compares a company’s invested funds or cash reserve s to meet its current liabilities (Prasad, 2008). John Deere’s cash ratio stands at 0.23. This means that the company’s cash reserves can meet $0.23 for every $1 of its current liabilities. The ratio , however, cannot be used to establish the overall liquidity health of a business such as John Deere.

The next set of ratios that can be used to determine whether John Deere is a sound investment venture is the valuation ratios. Some of these ratios are a price to earnings ratio (P/E) , debt to equity ratio, price to book ratio, and price to cash flow ratio. The P/E ratio denotes the price to earnings ratio and is calculated by dividing market value per share by earnings per share. This ratio enables the valuation of stocks and not a company. For instance, if the number of shares of a given stock rise, the price of stocks in a company will drop. John Deere’s P/E ratio is currently at 17.63. This is arrived at by dividing Deere’s share price which currently stands a $87.99 while its earnings per share were $4.99 in the quarter ended in Apri l 2016 (Marketwatch, 2016). The low P/E ratios are attractive for any investor as it means that in John Deere’s case , the earnings per share are greater than the price paid for a share by an investor. A low P/E ratio means that an investor will take less time to recover the funds used in the purchase of a company’s stock s . A P/E ratio that falls below 25-30 is a positive signal for an individual that desires to invest in John Deere. Debt to equity ratio, on the other hand, establishes the financial leverage that a business or corporation has (Prasad, 2008). The debt to equity ratio after the first quarter of 2016 ended April stands at 5.29. A high debt to equity ratio signals a company’s strategic decision to finance its growth with debt. The high debt may bring about interest expenses that may be transferred to the shareholder. With such a low ratio, buying John Deere ’s stocks is highly advisable.

The price to book ratio compares a company ’s stock market value to its overall book value. A low price to book ratio signals that a stock is undervalued and thus more attractive to an investor. The price to book ratio according to marketwatch.com for John Deere is 3.66. This is a small ratio given that it is less than ten. Lastly, the free cash flow per share is set at $-0.83 for John Deere. This ratio stands for the free cash flow per the share associated with the company’s stock (Prasad, 2008). This ratio is considered by many investment pundits as the most fundamental parameters in establish ing the earning power as it is not subject to the Depreciation Depletion and Amortization (DDA) (Doran & Wright, 2007).

John Deere A gricultural S tocks 

These stocks are the most viable for any investor. The investment in the agricultural stocks is viable due to their cumulative nature with their compounding financial returns, dividend growth, and cash flow. Farming and agriculture are vital sectors in any economy. In the American economy, it is one of the chief employers of an estimated 15% of th e workforce. While many farm or agricultural stocks have plummeted lately, the long-term economic prospects of agribusiness continue to posit long-term growth. It is prudent to note that the size of the arable land is decreasing due to growing urbanization and the general global population. The demand for food is thus assured. To satisfy this demand , agricultural inputs must be availed to the market. John Deere is instrumental in availing these inputs to aid farmers and agricultural business to become more productive.

This notwithstanding, John Deere has over the years worked on the globalization strategy. The company has tapped into emerging markets meaning that it has also enhanced its growth as well as revenues. These emerging markets have a strong appetite for dairy and high-value meat products which are directly linked to feeding grain as production inputs. It is thus key for an investor to not only focus on the U . S farm belt. Additionally, 35% of the farm equipment is attributed to the emerging markets across the world.

Investing in the agricultural stocks is advisable as agricultural equipment make up 70% of the company’s equipment sales. The company further has an effective finance segment that supports the sale of the John Deere equipment or other products. With the financing, the company has managed to push many agricultural units and inputs effectively. The company is also constantly diversifying its agricultural products through technology and massive investment in research and design. M ost of the farming equipmen t is incorporating computeriz ed technology which has been brought about by the increasing pressure on farmers to embrace technology as well as research to meet global food demand.

Mitigating Risks Associated with Stocks 

Any investment should always be seen as risky. It is thus fundamental for any investor to focus on mitigating risk. The first way that one can mitigate risk while investing is diversification (Bolton et al. , 2009). Diversification entails investing in different equities within the stock market. It also means investing across a variety of investments in varied asset classes. This will aid in reducing the market swings that may occasionally affect investments.

Another mitigation strategy is the dollar-cost averaging which suffices as a disciplined investment strategy that can aid in the smoothing out of occasional market fluctuations (Bolton et al., 2009). This approach works in a specific manner demanding that an individual applies a certain amount of dollars towards stocks purchase, mutual funds or bonds regularly. Consequently, one purchases more shares when the prices decline and less when prices are relatively high. With time, the average cost of shares will be said to be lower than the average price associated with shares.

Another strategy that can be used in mitigating risks associated with stocks is the purchase of low beta stocks. This strategy is anchored on the beta investment theory which cites that each stock has its correlation with the overall performance of the stock market (Bolton et al., 2009). This means that the higher the beta of a particular stock, the more volatile that business is relative to the market . This theory posits that stock may earn less within bull cycles but lose less when it is in bear cycles.

Recommendations 

I nvestment in the John Deere stocks is viable in that it has the potential to generate profits in the long-term for an investor. It is prudent however for an investor to sell declining stocks and retain the appreciating ones. Individuals must also carry out proper research on stocks before making the decision (Doran & Wright, 2007). Anticipated losses in stock prices should bring forth the option of disposal to shield an investor from more stock price declines and devaluation.

It would also be a key recommendation for stocks to be purchased after due diligence in terms of research by an individual. Chasing “hot tips” from friends and brokers may not necessarily lead to good investment decisions. Much of the investment should be looked at from a long-term angle. Thus, an investor should not be worried in terms of short-term market shocks as t here is need to focus on the bigger picture for any investor.

The next recommendation centers on not placing emphasi s on the P/E ratio especially in stocks touching viable economic segments such as agriculture. This ratio must be interpreted within its specific context but rather t here is need to incorporate a number of analytical processes. This ideally means that an investor should not feel threatened by a low P/E ratio or a high P/E to indicate that company might be overvalued . There is also need to resist the urge to pursue penny stocks (Doran & Wright, 2007). An investor should not go for only the low-priced stock. This is a common misconception that low-priced stock has low risks. In many instances, a penny stock may be a risky undertaking for stocks that have higher share price as they may attract a number of regulations. Lastly, it is prudent to stick to a single strategy to attain investment goals. There a re numerous ways to be successful, and no particular strategy is best. It is thus up to an investor to establish the right one and stick with it.

References 

Bolton, P., Chen, H., & Wang, N. (2009). A Unified Theory of Tobin's q, Corporate Investment, Financing, and Risk Management. doi:10.3386/w14845 

Doran, J. S., & Wright, C. (2007). What Really Matters When Buying and Selling Stocks ? SSRN Electronic Journal . doi:10.2139/ssrn.980291 

Marketwatch. (2016). DE Key Statistics - Deere & Co. Financial Ratios - MarketWatch. Retrieved from http://www.marketwatch.com/investing/stock /de/profile 

Prasad, G. B. (2008). Unconventional Ratios for Identifying Stocks.  How to Choose Winning Stocks: Rewriting Formulas for Investment , 97-101. doi:10.4135/9788132107903.n8 

Rukes , B. (2002).  John Deere industrials . St. Paul, MN: MBI Pub. Co.