John Deere: A potential bet on regenerative agriculture.

Regenerative agriculture is good for the environment as it removes carbon from the atmosphere and puts it back in the soil. It helps solve the climate crisis, and companies are starting to support regenerative agriculture in their supply chains for environmental, social, and governance (ESG) reasons. It is hard to find companies that benefit from farmers switching from traditional farming to regenerative farming, but one company could be Deere & Company.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and briefly go through why the company has meaning to me. I have changed the format of the analysis a bit to try to make it shorter and with less numbers. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.

For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in Deere & Company. If you would like to replicate my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their competitors either. Deere & Company has been on my watchlist for years, but I haven't made a decision yet. In this analysis, I will investigate whether now is the right time to buy the shares. If you want to purchase shares or fractional shares in Deere & Company, you can do so through eToro. eToro is a highly user-friendly platform that allows you to start investing with as little as $50.

Deere & Company was founded in 1837 in Illinois, United States. The company is primarily known for manufacturing agricultural machinery, heavy equipment, and forestry machinery. Their operations are categorized into four business segments. The first segment is production and precision agriculture, which accounts for 37% of their revenue. This segment focuses on providing equipment and technology for growers of grains, cotton, and sugar. The small agriculture and turf segment, which accounts for 26% of revenue, focuses on providing equipment and technology for dairy and livestock producers. The construction and forestry segment delivers machines and technology for earthmoving, forestry, and roadbuilding. The financial services segment, which accounts for 11% of revenue, primarily finances the sales and leases of equipment by John Deere dealers. Deere & Company is a long-standing company that has weathered variouseconomic cycles, including civil wars, world wars, recessions, and pandemics. Deere & Company is a market leader, with an 18% market share in the overall farming equipment market. The four largest companies collectively control 45% of the market. Hence, I believe that Deere & Company has a significant brand moat.

Their CEO is John C. May. He joined Deere & Company in 1997 and held various positions until he became the CEO in 2019 and Chairman of the board in 2020. He holds a bachelor's degree from the University of New Hampshire and an MBA from the University of Maine. Besides being the CEO and Chairman of the board at Deere & Company, he also sits on the board of the Ford Motor Company. John C. May has delivered impressive results as a leader, as the market cap of Deere & Company has doubled under his leadership. He has been acknowledged by Barron's as one of the top CEOs in2022. I haven't been able to find much information about John C. May, and he has only been CEO for a short time. However, his results and the acknowledgement from Barron's mean that I feel confident in John C. May leading Deere &Company moving forward.

I believe that Deere & Company has a strong brand moat. Furthermore, I feel confident in the management. Now let us investigate the numbers to see if Deere & Company meets our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.

The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a ROIC above 10% in all years. The return on invested capital (ROIC) of Deere & Company is very underwhelming, to say the least. Except for the last year, they haven't managed to exceed 10% in any of the years over the past decade. It was a bit surprising to see a return on invested capital (ROIC) like this, as high-moat companies usually deliver a high ROIC. However, there is an explanation for the low ROIC, and that is debt. Later in the analysis, I will share the return on equity (ROE), which does not consider debt, and you will see other numbers. The return on invested capital (ROIC) is underwhelming, but if you can tolerate the high debt, you will see that the return on equity (ROE) is quite good.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. While there have been periods where equity has decreased, it is promising to see that equity has grown since 2016 and reached an all-time high in 2022. I feel confident with these numbers.

Finally, we will investigate the free cash flow. In short, free cash flow refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. What comes to mind is that the free cash flow is not positive in all years. I believe that it reflects the cyclical nature of the industry in which Deere & Company operates. This means that there will be years with negative cash flow. You will need to be able to stomach that if you invest in Deere & Company or other companies in the sector. Leveraged free cash flow was high in both 2020 and 2021 but has decreased significantly in 2022. Additionally, the low free cash flow yield indicates that the company is not currently cheap. However, we will discuss this further in the analysis.

Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a 3-year period. This can be assessed by calculating the ratio of long-term debt to earnings. Based on my calculation of Deere & Company, it appears that the company has a debt-to-earnings ratio of 4,71 years, which exceeds the acceptable limit. Another thing to be aware of is that Deere & Company had record earnings in 2022, which means the numbers may appear more favorable than they actually are. In the three years leading up to 2022, Deere & Company had accumulated more than 10 years' worth of earnings in debt, which is concerning to me. If you want to invest in Deere & Company, you will need to accept the high level of debt. The high debt was reflected in the return on invested capital (ROIC). As promised earlier, I will share the Return on Equity (ROE) for the last 10 years below. It is just to give you an idea of how debt is reflected in the numbers.

Like every other investment, there are risks associated with investing in Deere & Company. One obvious risk that we just touched upon is debt. Over the last 8 years prior to 2021, Deere & Company had an average 10,8 years of earnings in debt. In his book "Rule #1 Investing," Phil Town mentions the following about debt: "A business that is carrying a lot of debt relative to its income has an unpredictable financial future. If there are any problems with the economy, a business with a lot of loans might be in big trouble". As an investor, I dislike unpredictability. Although I do not believe that Deere & Company will go bankrupt, I am concerned about companies with significant debt unless there is a justifiable reason, such as an acquisition. If you invest in Deere & Company, it will require monitoring. Another risk is supply chain shortages, commodity price fluctuations, and freight price increases. It is something that management extensively addressed in their last couple of earnings call. Freight prices are high, which negatively impacts profit margins. Supply chain shortages mean that Deere & Company cannot obtain all of their parts, resulting in their inability to ship the finished product to customers. And finally, high commodity prices have also affected profits.Regarding commodity prices, management explained that they do not have fixed contracts for steel, which means they have experienced progressively higher costs. Economic slowdown. In its annual report, Deere & Company explains that negative economic conditions could result in reduced demand for its products. "The demand for John Deere's products and services can be significantly reduced in an economic environment characterized by high unemployment, cautious consumer spending, lower corporate earnings, U.S. budget issues, and lower business investments." Some of these events are currently occurring and could potentially create challenges for Deere & Company.

There is also a lot of potential for Deere & Company moving forward. One reason is if farmers have higher input costs. By "higher input costs," I mean expenses such as seeds and fertilizers, which have significantly increased in price this year. These higher input costs make farmers consider alternative farming methods. Deere & Company offers products that enable farmers to reduce input waste without sacrificing yields. Deere & Company has introduced a product called ExactRate, which applies liquid nitrogen at the time of planting. It means that farmers will be more precise with the use of fertilizer, and estimates suggest that farmers may end up using 70% less fertilizer than usual. With the high input costs, management mentioned that they continue to see strong demand for products like these. A significantly larger addressable market. In 2022, Deere & Company delivered revenue of approximately $52,5 billion.However, management believes that their total addressable market is worth more than $150 billion. It means that there isplenty of room to grow, as management believes they have only reached 35% of their addressable market. Regenerative Agriculture. The reason I came across Deere & Company in the first place was because I was looking at companies that could benefit from the transition into regenerative agriculture. It is a transition that has received little attention in the media, but I believe it will have a significant impact in the future. Regenerative agriculture makes sense for farmers, as a study found that farms with regenerative practices were up to 78% more profitable than conventional plots. It makes sense for companies to adopt regenerative agriculture for ESG (Environmental, Social, and Governance) reasons. Companies such as Pepsico, Walmart, General Mills, Unilever, Danone, and Kellogg's have already transitionedsome of their supplies to come from regenerative agriculture, and this trend is expected to continue growing in the future. You might wonder how it will affect Deere & Company. They already have products that can be used in regenerative farming, such as manure spreaders and no-till drills. And there will be more to come, as Deere & Company is focused on developing electric alternatives to their fuel-powered products.

All right, we have gone through the numbers, potential and risk regarding Deere & Company, and now it is time for us to calculate a price for Deere & Company. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS of 20, which is slightly lower than the record in 2022 but slightly higher than in 2021. I chose an estimated future EPS growth rate of 10% (as the consensus among analysts is an expected growth rate of 10,7%). I also selected an estimated future PE of 20, which is double the growth rate, considering that historically, the PE for Deere & Company has been higher. Additionally, we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $256,45. We want to have a margin of safety of 50%, so we will divide it by 2, meaning that we want to buy Deere & Company at a price of $128,23 (or lower obviously) if we use the Margin of Safety price.

Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 4.699. The capital expenditures were 3.788. I tried to look through their annual report to see how much of the capital expenditures were used for maintenance. I couldn't find it, so as a rule of thumb, you can expect 70% of the capital expenditures to be used on maintenance. This means that we will use 2.651,6 in our further calculations. The tax provision was 2.007. We have 298,772 outstanding shares. Hence, the calculation will be like this: (4.699- 2.651,6 + 2.007) / 298,772 x 10 = $135,70 in Ten Cap price.

The last calculation is the Payback Time. I also described in "MY STRATEGY". With Deere & Company's Free Cash Flow Per Share at 7,15 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $37,99.

Deere & Company is an interesting company. They are a company that has survived all possible economic cycles. The company has a strong competitive advantage, and although we have limited information to assess management, they have performed well. I believe that most of the risks are short-term for Deere & Company. Supply chains will normalize, commodity prices have been coming down recently, and freight prices have also decreased. There will be some economic headwinds to come, but no one knows how long they will last. I am really impressed by the potential of Deere & Company, and I believe that regenerative agriculture has been overlooked by the media. I think Deere & Company could greatly benefit from embracing this transition. Nevertheless, I cannot come to terms with the high debt. Therefore, I would require a significant discount if I were to invest in Deere & Company. Hence, I will not invest in Deere & Company unless it reaches the Ten Cap price of $135,70.

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