Breaking Down Deere & Company (DE) Financial Health: Key Insights for Investors

Understanding Deere & Company (DE) Revenue Streams

Understanding Deere & Company’s Revenue Streams

Deere & Company generates its revenue from various segments, primarily categorized into equipment operations and financial services. The equipment operations include production and precision agriculture, small agriculture and turf, and construction and forestry.

Breakdown of Primary Revenue Sources

Year-over-Year Revenue Growth Rate

The overall net sales and revenues for the third quarter of 2024 amounted to $13,152 million, reflecting a decrease of 17% compared to $15,801 million in Q3 2023. Year-to-date (YTD) net sales for 2024 were $40,572 million, down 11% from $45,839 million in 2023.

Contribution of Different Business Segments to Overall Revenue

For the third quarter of 2024, the contributions from the various segments were as follows:

• Production & Precision Agriculture: 39%
• Small Agriculture & Turf: 23%
• Construction & Forestry: 25%
• Financial Services: 13%

These contributions highlight the significant role of equipment operations in the overall revenue structure, with production and precision agriculture being the largest contributor.

Analysis of Significant Changes in Revenue Streams

Comparing Q3 2024 to Q3 2023, the most notable decline was seen in the production and precision agriculture segment, which experienced a 25% decrease in net sales due to lower shipment volumes driven by reduced commodity prices and higher interest rates. Similarly, the small agriculture and turf segment saw an 18% decline due to uncertainties in commodity prices. In contrast, the financial services segment posted a 15% increase in revenue, attributed to higher average financing rates and an increase in the average balance of receivables and leases financed.

A Deep Dive into Deere & Company (DE) Profitability

Profitability Metrics

Gross Profit Margin: For the three months ended July 28, 2024, the gross profit margin was 31.1%, down from 32.6% in the same period of 2023. For the nine months ended July 28, 2024, the gross profit margin was 31.8%, compared to 32.3% in 2023.

Operating Profit Margin: The operating profit for the third quarter of 2024 was $1,734 million, reflecting a 42% decrease year-over-year. The operating margin for the quarter stood at 13.2%, down from 18.8% in Q3 2023. For the nine months ended July 28, 2024, the operating profit was $5,855 million, with a margin of 14.4%, compared to 17.0% in the prior year.

Net Profit Margin: The net profit margin for the three months ended July 28, 2024, was 13.2%, a decline from 18.8% in the same quarter of 2023. For the nine months, the net profit margin was 14.4%, down from 17.0% in 2023.

Trends in Profitability Over Time

The following table summarizes the trends in profitability metrics over the past two years:

Comparison of Profitability Ratios with Industry Averages

As of 2024, the industry average gross profit margin for comparable companies is approximately 32.5%, indicating that the company is slightly below the industry average. The operating profit margin in the industry averages around 15%, which positions the company below average as well. The net profit margin for the industry stands at 14%, which is comparable to the company’s performance.

Analysis of Operational Efficiency

The cost of sales to net sales ratio for the three months ended July 28, 2024, was 68.9%, compared to 67.4% in Q3 2023. Over the nine-month period, this ratio was 68.2% for 2024 versus 67.7% in 2023, indicating a decline in operational efficiency primarily due to increased overhead costs from reduced volumes.

Research and development expenses for the three months ended July 28, 2024, were $567 million, a 7% increase from $528 million in the same period last year. Selling, administrative, and general expenses increased to $1,278 million from $1,110 million, reflecting a 15% increase, largely due to higher provisions for credit losses and inflation-driven employee pay increases.

The following table summarizes the operational efficiency metrics:

Debt vs. Equity: How Deere & Company (DE) Finances Its Growth

Debt vs. Equity: How Deere & Company Finances Its Growth

Debt Levels

As of July 28, 2024, the total liabilities of Deere & Company amounted to $107,841 million, including $43,896 million in financing receivables.

The company reported $15,512 million in borrowings issued with maturities greater than three months during the first nine months of 2024.

Short-term borrowings were $992 million during the same period.

Debt-to-Equity Ratio

The debt-to-equity ratio for Deere & Company stands at 8.5 to 1, reflecting its reliance on debt financing compared to equity.

This ratio is significantly higher than the industry average, which typically ranges from 1.0 to 2.0.

Recent Debt Issuances and Activity

In the first nine months of 2024, Deere & Company issued $15,512 million in long-term borrowings. The company also retired $10,792 million in borrowings during this period.

As of July 28, 2024, the company had $1,566 million in securitization borrowings outstanding.

The company’s credit rating remains strong, although specific ratings were not disclosed in the latest financial reports.

Balancing Debt Financing and Equity Funding

Deere & Company continues to balance its funding through a combination of debt and equity. In the first nine months of 2024, the company returned $4,429 million to shareholders through dividends and stock repurchases.

Additionally, the company maintains significant cash reserves, with $8,144 million in cash, cash equivalents, and marketable securities.

Assessing Deere & Company (DE) Liquidity

Assessing Liquidity and Solvency

Current and Quick Ratios

The current ratio for the company stands at 1.18 as of July 28, 2024, indicating that current assets exceed current liabilities. The quick ratio is reported at 0.95, suggesting that the company can cover its short-term obligations without relying on inventory sales.

Analysis of Working Capital Trends

As of July 28, 2024, the company reported working capital of $5,412 million, a decrease from $6,112 million in the previous year, reflecting a tighter liquidity position. Trade accounts and notes receivable have decreased by $270 million during the first nine months of 2024, primarily due to lower sales volumes.

Cash Flow Statements Overview

For the nine months ended July 28, 2024, the net cash provided by operating activities was $4,139 million, an increase from $2,896 million in the prior year. Investing activities used $3,671 million, a reduction from $4,563 million in 2023. Financing activities resulted in a net cash outflow of $789 million, compared to an inflow of $3,379 million in the previous year.

Potential Liquidity Concerns or Strengths

The decrease in cash, cash equivalents, and restricted cash to $7,293 million from $6,778 million year-over-year indicates a slight decline in liquidity. Unused credit lines are reported at $4,917 million, providing a buffer against potential liquidity issues. The ratio of interest-bearing debt to stockholder’s equity stands at 8.5 to 1, reflecting a high level of leverage which may pose concerns for solvency in a tighter market environment.

Is Deere & Company (DE) Overvalued or Undervalued?

Valuation Analysis

The valuation analysis of the company involves several key financial ratios that help determine if the stock is overvalued or undervalued. The primary ratios considered include the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) ratios.

Price-to-Earnings (P/E) Ratio

As of July 28, 2024, the diluted earnings per share (EPS) is $6.29, while the stock price is approximately $350. This results in a P/E ratio of:

P/E Ratio = Stock Price / Diluted EPS = $350 / $6.29 ≈ 55.7

Price-to-Book (P/B) Ratio

The book value per share is calculated from the total stockholders' equity of $23,062 million and shares outstanding of 273.6 million.

Book Value per Share = Total Stockholders' Equity / Shares Outstanding = $23,062 million / 273.6 million ≈ $84.3

The P/B ratio is then:

P/B Ratio = Stock Price / Book Value per Share = $350 / $84.3 ≈ 4.15

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The enterprise value (EV) can be calculated as follows:

• Market Capitalization: $350 273.6 million = $95.7 billion
• Total Debt: $42.7 billion
• Cash and Cash Equivalents: $7 billion

Thus, EV = Market Capitalization + Total Debt - Cash = $95.7 billion + $42.7 billion - $7 billion = $131.4 billion.

For EBITDA, the latest available figure is $10 billion.

EV/EBITDA Ratio = Enterprise Value / EBITDA = $131.4 billion / $10 billion ≈ 13.14

Stock Price Trends

The stock price has shown a trend over the past 12 months, starting from approximately $400 in August 2023, declining to around $350 in July 2024, reflecting a decrease of 12.5%.

Dividend Yield and Payout Ratios

The company declared a dividend of $1.47 per share, with a current stock price of $350. The dividend yield is calculated as:

Dividend Yield = Annual Dividends / Stock Price = $1.47 / $350 ≈ 0.42%

The payout ratio based on the diluted EPS of $6.29 is:

Payout Ratio = Dividends per Share / EPS = $1.47 / $6.29 ≈ 23.4%

Analyst Consensus on Stock Valuation

As per the latest analyst consensus, the stock is rated as follows:

• Buy: 8 analysts
• Hold: 6 analysts
• Sell: 2 analysts

Key Risks Facing Deere & Company (DE)

Key Risks Facing Deere & Company

Deere & Company faces various internal and external risks that could significantly impact its financial health. These risks include competitive pressure within the industry, regulatory changes, and evolving market conditions.

Industry Competition

The agricultural and construction equipment industries are highly competitive, with numerous players vying for market share. In Q3 2024, net sales decreased by 17% to $13.15 billion compared to $15.80 billion in Q3 2023, reflecting the challenges posed by competitive pressures.

Regulatory Changes

Changes in regulations, particularly those related to environmental standards and trade policies, pose additional risks. The ongoing geopolitical tensions may lead to new tariffs or trade barriers, affecting the company's operations and profitability.

Market Conditions

Fluctuations in commodity prices and economic downturns can negatively impact demand for Deere's products. In the first nine months of 2024, net income attributable to the company decreased by 25% to $5.86 billion from $7.80 billion in the same period of 2023.

Operational Risks

Operational risks include disruptions in the supply chain, which can delay production and delivery. The company reported lower shipment volumes in key markets, such as the U.S., Brazil, and Europe.

Financial Risks

Interest rate fluctuations significantly affect the company's financing costs. In Q3 2024, interest expense increased by 35% to $840 million compared to $623 million in Q3 2023, primarily due to higher average borrowing rates.

Strategic Risks

Strategic risks include the company's ability to innovate and adapt to new technologies. Investments in digital capabilities and automation are critical, yet they carry uncertainties regarding market adoption and monetization.

Mitigation Strategies

To mitigate these risks, Deere & Company has implemented several strategies:

• Enhancing supply chain resilience through diversified sourcing.
• Investing in technology to improve operational efficiency.
• Utilizing financial hedging to manage interest rate exposure.

Risk Factors Table

Future Growth Prospects for Deere & Company (DE)

Future Growth Prospects for Deere & Company

Analysis of Key Growth Drivers

The company's growth is supported by several key drivers:

• Product Innovations: The ongoing investment in research and development is evident, with $1,664 million allocated for the first nine months of 2024, a 6% increase from $1,571 million in 2023.
• Market Expansions: The company's revenues from international markets, particularly Latin America and Asia, are expected to grow as they increase their presence in these regions. For example, net sales from Latin America reached $6,099 million for the nine months ended July 30, 2023.
• Acquisitions: Strategic acquisitions are anticipated to enhance product offerings and market share, although specific acquisitions were not detailed in the latest financial statements.

Future Revenue Growth Projections and Earnings Estimates

Future revenue growth is projected to stabilize as the company adapts to market conditions. The net sales and revenues reported for the first nine months of 2024 totaled $40,572 million, down from $45,839 million in the same period in 2023, indicating a 11% decline. However, analysts predict a rebound in 2025, with an estimated growth rate of 5% to 7% annually driven by increased demand for agricultural and construction equipment.

Strategic Initiatives or Partnerships

The company continues to pursue partnerships that leverage technology and innovation. The focus on digital capabilities and automation is expected to drive future growth. For instance, the company has invested significantly in developing autonomous machinery and precision agriculture technologies, which are projected to increase operational efficiency and reduce costs for customers.

Competitive Advantages

Deere & Company holds several competitive advantages that position it well for future growth:

• Strong Brand Reputation: A legacy of quality and reliability in the agriculture and construction sectors.
• Global Distribution Network: Access to international markets enhances its ability to respond quickly to changing demands.
• Advanced Technology Integration: The ongoing development of precision agriculture solutions places the company ahead of its competitors.

Financial Performance Overview

The financial data indicates a challenging environment in 2024, with a notable decline in both sales and net income compared to 2023. However, the company's strategic initiatives and focus on innovation suggest potential for recovery and growth in the coming years.