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Deere Is Trading At A No-Growth Price: There Is An Adequate Margin Of Safety

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John Deere Vintage Classic Tractor Show with US flags

Introduction

This article examines the growth rate of Deere & Company (NYSE:DE) and its current stock price. By analyzing Deereโ€™s financial data, we estimate its sustainable growth rate and compare it to the companyโ€™s actual growth rate. Additionally, we assess the implied growth rate in Deereโ€™s stock price to determine potential investment opportunities.

Sustainable Growth Rate

The sustainable growth rate of a company is calculated by multiplying the retention ratio (the percentage of earnings not paid out as dividends) by the return on equity (ROE). Higher retention ratios and ROEs contribute to a higher sustainable growth rate.

The return on equity is determined by three factors: the leverage in the capital structure, the efficiency of business operations measured by the asset turnover, and the profitability. Higher profitability, efficiency, and leverage lead to a higher return on equity.

Table 1 shows Deereโ€™s retention ratio over the years, averaging just above 69 cents retained for every dollar earned.

Table 1: Deere Retention Ratio (Per Share Data)
Diluted EPS Dividends paid Retained per share Retention ratio
2013 $ 9.09 $ 1.94 $ 7.15 78.7%
2014 $ 8.63 $ 2.13 $ 6.50 75.3%
2015 $ 5.77 $ 2.40 $ 3.37 58.4%
2016 $ 4.81 $ 2.40 $ 2.41 50.1%
2017 $ 6.68 $ 2.40 $ 4.28 64.1%
2018 $ 7.24 $ 2.49 $ 4.75 65.6%
2019 $ 10.15 $ 2.97 $ 7.18 70.7%
2020 $ 8.69 $ 3.04 $ 5.65 65.0%
2021 $ 18.99 $ 3.32 $ 15.67 82.5%
2022 $ 23.28 $ 4.28 $ 19.00 81.6%
Average 69.21%



Table 2: Asset Turnover (Per Share Data)
Net Sales and Revenues Total Assets Asset Turnover
2013 $ 97.11 $ 152.76 0.66
2014 $ 98.52 $ 167.35 0.62
2015 $ 85.90 $ 172.27 0.51
2016 $ 84.16 $ 182.94 0.47
2017 $ 91.98 $ 203.48 0.48
2018 $ 114.14 $ 214.20 0.55
2019 $ 122.45 $ 227.73 0.55
2020 $ 112.26 $ 237.18 0.48
2021 $ 140.20 $ 267.88 0.56
2022 $ 171.65 $ 293.93 0.61
Average 0.55



Table 3: Profit Margin (Per Share Data)
Net Sales and Revenues Diluted EPS Profit Margin
2013 $ 97.11 $ 9.09 9.4%
2014 $ 98.52 $ 8.63 8.8%
2015 $ 85.90 $ 5.77 6.7%
2016 $ 84.16 $ 4.81 5.7%
2017 $ 91.98 $ 6.68 7.3%
2018 $ 114.14 $ 7.24 6.3%
2019 $ 122.45 $ 10.15 8.3%
2020 $ 112.26 $ 8.69 7.7%
2021 $ 140.20 $ 18.99 13.5%
2022 $ 171.65 $ 23.28 13.6%
Average 8.73%



Table 4: Leverage Ratio for Deere (Per Share Data)
Liabilities per share Average share price Leverage Ratio
2013 $ 126.55 $ 85.87 2.47
2014 $ 142.78 $ 87.37 2.63
2015 $ 152.35 $ 87.97 2.73
2016 $ 162.27 $ 80.57 3.01
2017 $ 173.87 $ 114.43 2.52
2018 $ 179.66 $ 149.98 2.20
2019 $ 192.08 $ 157.96 2.22
2020 $ 196.30 $ 173.04 2.13
2021 $ 209.17 $ 335.33 1.62
2022 $ 227.47 $ 362.33 1.63
Average 2.32



Table 5: Sustainable Growth Rate for Deere (2013-2022)
Retention ratio 69.21%
Asset turnover 0.55
Profit margin 8.73%
Leverage ratio 2.32
Sustainable growth rate 7.68%




Table 6: Actual Growth Rates for Deere (2013 to 2022)
EPS Diluted Dividends paid CFO* per share
2013 $ 9.09 $ 1.94 $ 8.36
2014 $ 8.63 $ 2.13 $ 9.63
2015 $ 5.77 $ 2.40 $ 11.19
2016 $ 4.81 $ 2.40 $ 11.91
2017 $ 6.68 $ 2.40 $ 6.79
2018 $ 7.24 $ 2.49 $ 5.57
2019 $ 10.15 $ 2.97 $ 10.64
2020 $ 8.69 $ 3.04 $ 23.64
2021 $ 18.99 $ 3.32 $ 24.61
2022 $ 23.28 $ 4.28 $ 15.34
CAGR* 11.02% 9.19% 6.98%



Table 7: Forward Earnings Estimate for DE
FY October 2023 $ 33.78



Table 8: Cost of Equity Estimate using CAPM
ฮฒ Equity risk premium Risk-free rate Cost of Equity
0.96 4.40% 4.48% 8.70%



Table 9: No-growth Value of Deere
E1 Cost of Equity No-growth Price
33.78 8.70% $ 388.10



Conclusion

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