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Edited by Juna Yanoyan
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Based in Moline, Ill., Deere & Company (NYSE:DE) designs and manufactures agricultural, landscaping, construction, and forestry equipment. The firm typically finances a large portion of its equipment sales through its Deere Credit subsidiary. Founded in 1837 by John Deere, the company now employs more than 50,000 people around the world.
FinViz.com
In the past year, the Deere & Company (DE) stock has hit a 52W low of $67.78 and 52W high of $89.70. The stock is currently trading 3.59% below 52W high and 28.24% above 52W low.
GROWTH AND BALANCE SHEET
The company’s annual earnings growth rate over the past five years is 16.55%. EPS growth quarter over quarter is 17.08%. The company, on the basis of net income growth from the same quarter one year ago, has significantly underperformed compared to the Machinery industry average. The total Debt/Equity of 422% makes us feel very uncomfortable.
VALUATION
Deere has a market cap of $32.2 billion and is part of the industrial goods sector. A P/E of 10.91 times is close to industry average. The beta of 1.44 implies high volatility of the stock with respect to the S&P 500. The firm has had generally very high debt risk by most measures that we evaluated. During the past fiscal year, DE increased its bottom line by earning $6.63 versus $4.36 in the prior year.
RECOMMENDATION for next 6 months: We initiate our coverage with NEUTRAL Deere & Company stock. The company has demonstrated a pattern of neutral technical signs and notable fundamental performance. We believe it offers a low risk-reward scenario versus its competitors in the Farm & Construction Machinery industry. Shares are up 5.68% year to date as of the close of trading on Tuesday. Currently there are nine analysts that rate Deere a buy, two analysts rate it a sell, and six rate it a hold. Average recommendation is 2.40 (1=Buy 5=Sell).
For trading we suggest a long put at $80 for the December expiration,
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VALUATION |
DE STOCK |
||||
| Market Cap: |
32.01B |
Beta |
1.44 |
||
| Enterprise Value |
59.68B |
1 Month Stock Returns |
4.50% |
||
| P/E |
10.91 |
Year to Date Stock Returns |
5.68% |
||
| PEG Ratio |
0,65 |
1 Year Stock Returns |
24.41% |
||
| Price/Sales |
0.93 |
3 Year Stock Returns |
90.23% |
||
| Price/Book |
4.38 |
52-Week Change |
15.47% |
||
| Enterprise Value/Revenue |
1.71 |
S&P500 52-Week Change |
21.78% |
||
| Enterprise Value/EBITDA |
10.66 |
52-Week High |
89.70 |
||
| Dividend Yield |
1.01% |
52-Week Low |
67.78 |
||
| 50-Day Moving Average |
79.26 |
||||
| Held by insiders |
0.60% |
200-Day Moving Average |
7.21 |
NEWS and CALENDAR
Next Earnings Release Date: 11/21/12
Tuesday, October 9, 2012 11:54 PM – Deere & Co.’s (DE) finance arm sold $1 billion of bonds in a two-part offering. John Deere Capital Corp. issued $500 million of 1.7 percent notes due January 2020, the tractor-maker’s lowest-ever coupon for dollar-denominated debt with similar maturities. The company also sold $500 million of two-year, floating-rate securities yielding 10 basis points more than the London interbank offered rate, Bloomberg data show. A basis point is 0.01 percentage point.
Wednesday August 29, 2012 – The Deere & Company (NYSE:DE) Board of Directors declared a regular quarterly dividend of $.46 a share on common stock, payable November 1, 2012, to stockholders of record on September 28, 2012.
Wednesday August 15, 2012 – Deere & Co announced that for fiscal 2012, net income is anticipated to be about $3.1 billion. According to I/B/E/S Estimates, analysts on an average were expecting the Company to report net income of $3.3 billion for fiscal 2012
| Competitor Comparison | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DE | CAT | CNH | KUB | Industry | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Market Cap: | 32.01B | 55.36B | 9.60B | 12.76B | 740.68M | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Employees: | 61,3 | 132,825 | 32,7 | 29,185 | 7.64K | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Qtrly Rev Growth (yoy): | 0.15 | 0.22 | 0.02 | 0.12 | 0.20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Revenue (ttm): | 34.98B | 66.31B | 20.12B | 13.19B | 998.30M | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Margin (ttm): | 0.29 | 0.27 | 0.24 | 0.27 | 0.27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EBITDA (ttm): | 5.60B | 11.42B | 2.79B | 1.63B | 83.80M | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Margin (ttm): | 0.13 | 0.13 | 0.12 | 0.10 | 0.09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income (ttm): | 3.05B | 5.97B | 1.09B | 775.99M | N/A | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EPS (ttm): | 7.49 | 8.94 | 4.53 | 3.09 | 1.64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| P/E (ttm): | 10.91 | 9.48 | 8.78 | 16.47 | 10.66 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PEG (5 yr expected): | 0.96 | 0.65 | 0.77 | 1.86 | 0.91 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| P/S (ttm): | 0.93 | 0.84 | 0.49 | 0.96 | 0.72 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Stock valuation model The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock. Intrinsic value of the stock Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized. DE intrinsic value is $87.00 the current price is $81.73, that gives us a possible upside of 7%. Financials The financial health of the company the higher the better Sentiment Investor’s sentiment for the stock Analyst ratings The model assigns a value according to analyst’s recommendation for the stock. Earnings Consistency According to this model, each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high. DE, annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 4.00, 4.70, 2.06, 4.35, 6.63, this type of earnings action is favorable. Total Debt/Equity The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry DE’s Total Debt/Equity of 422.23% is not acceptable. Quarterly EPS Change (This Quarter VS. Same Quarter Last Year) The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 18% that this model likes to see for a “good” growth company. DE’s EPS growth for this quarter relative to the same quarter a year earlier is 17.09% below our target. Annual Earnings Growth This model looks for annual earnings growth above 12%, but prefers higher than 20%. DE’s annual earnings growth rate over the past five years is 16.50%, is above our target growth. Current Price Level Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend. DE’s 52 week high is $89.70 current price is $81.73 only 7% below the high. P/E Ratio The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. The company has a P/E ratio of 10.9 the average industry P/E ratio is 10.66 and well below the S&P 500 P/E ratio of 17.1 Insider Ownership When there is strong insider ownership which I define as 12% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders. Insiders own only 0.60% of DE stock. Management’s representation is not large enough. This does not satisfy the minimum requirement, and companies that do not pass this test are less attractive. Technical Analysis I am using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value. On Balance Volume (OBV) is bearish and moving down for DE, MACD gives a bullish sign for the short term. Our indicators give a neutral view on DE:
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