John Deere: Upbeat or Downtrodden?

Company Overview

Founded in 1837 and listed on the NYSE & S&P 500 John Deere continues to operate a substantial and growing heavy equipment business. The group continues to perform relatively well, given the headwinds of trade tensions in China and flat outlook for US growth in the coming year. On paper the company remains expensive relative to its balance sheet but profitability remains within expectations indicating a mixed bag for investors looking at DE today.

Fundamentals

Share Price

$135.52

Segments:

Revenues

Profits

Market Cap

ca. $42.5bn

Deere Equipment

$34.8bn

$1.47bn

Group Revenues

ca. $40bn

Financial Services

$0.54bn

$50m

Group Profits

ca. $3bn

Construction & Forestry

$11.2bn

$400m

Assets

$73.01bn

A.G & Turf

$23.60bn

$1bn

Liabilities

$61.58bn

 

 

 

Book Value

ca. $11.4bn

 

Total 2019 Profits

ca. $3bn

Headwinds

Growth outlook remains flat for DE’s biggest market, the United States of America through 2020 as Soybean production remains subdued and inventory is reduced to strengthen both cashflow and relative cash position of the wider group. Cotton sales during Q2 are likely to fall modestly, highlighting the general weakness in agriculture output at the present time.
Furthermore, it is worth noting the company is Q3 and Q4 heavy, meaning the overall strength of 2020s performance is unlikely to be understood until much later in the year.
The forestry division continues to battle with headwinds caused by the reduction in timber demand causing short term pain for this segment, this is further compounded by the now world wide nature of COVID-19. Long term the outlook is substantially more positive, world population continues to grow as does aggregated wealth, and the need for timber as a raw material is inevitably going to trend upwards over long-term time horizons.
As to construction, while it has provided moderate if unimpressive results so far this year it is certainly possible to hypothesis a situation where increased infrastructure spending by the US and other developed economies could provide a modest boost as governments around the world attempt to kick start economies post COVID-19 as life returns to normal.

Opportunities

The new product mix, specifically the introduction of new products has adversely impacted short term performance. However, initial indications provide reassurance that the market has taken to these new products well, and so a slight bounce back should be expected later through 2020. This will help smooth results out over a multi-year period and is a reason for optimism. Specifically, the introduction of precision based equipment is proving popular, and should drive demand well into the 2020s.
Re-organisation continues and management indicate that the effects of this are starting to feed through the system. This is likely to be a mixed bag through 2020 but should improve core operational efficiency as the firm moves into 2021 and beyond.

DE-5-Year-Total-Employees-Chart
Total Number of Employees 5 Year Chart (John Deere, 2019)

Furthermore, a pickup in the construction segment due to world governments supporting economic growth through infrastructure would be seen as an additional crux of support to mid-term growth.
Overall, the performance of 2020 is to be dictated by results during Q3/Q4, which will provide a strong indication to both the new product lines and assurance to investors that the reorganisation program is both bearing fruit and not providing material harm to growth prospects moving forward.

Conclusion

To conclude, the John Deere group faces a year of low growth with results tilted heavily towards the second half of the year. It is therefore likely that investors will hold off on purchases until the group indicates a solid set of second half results. Prices today remain relatively high and this prices in a relatively upbeat FY2020, indicative of investors’ confidence in both the business and current management.