Deere & Company (NYSE:DE), a leading provider of agricultural and forestry equipment, operates in the tractors and agricultural machinery manufacturing industry. The industry was affected largely by the recession, but now the agriculture sector is rapidly improving around the world.
In spite of a lower growth rate in population and disastrous stock market and economy, Deere has realized a massive increase in revenues in the recent years which include $32,013 million, $36,157 million and $37,795 million in 2011, 2012 and 2013, respectively. The company's net income has also risen from $2,800 in 2011 to $3,537 in 2013.
With the growing global population, food demand will increase significantly in the coming years. Global food demand is expected to increase by 77% between 2006 and 2050. To meet the increasing demand, producers of farm products will have to increase production. To increase production, farmers will need larger, more efficient, and more advanced equipment, as a result, demand for agricultural equipment will increase. World demand for agricultural equipment is estimated to increase 6.7% per year through 2016 to $173.5 billion.
Deere is already positioned well in the U.S. and Canada, now it is expanding its operations in other countries to increase growth. Growing global demand for food and improving technology and income in emerging economies will create new market for Deere to enter. The company predicts that its revenues coming from outside the U.S. and Canada will increase to 50% of total revenues, up from 37% currently. The two geographic segments with the most potential growth are China and India. Economic condition and situation in China and India is relatively better than U.S and Europe, and are transitioning towards becoming mature markets.
China and India will provide great growth opportunities to Deere. By 2050, the world's population is expected to reach 9.7 billion, and most of the growth will come mostly from China and India. These countries are now moving to more productive methods of farming, including upgrading equipment and technology. The Chinese government is focused on improving farmers' incomes which will lead to increasing purchases of farm equipment. Agricultural equipment sales in China are forecast to grow 10%-15% a year over the next decade.
Agriculture is the dominant sector of Indian economy, which determines the growth and sustainability. More than 65% of the country's population still depend on agriculture for employment and livelihood. Agricultural equipment market in India is experiencing a rapid growth with expected strong potential for future growth as well. Among all the agricultural machinery, tractor is the most demanding machinery in the Indian agriculture sector.
Deere is well known for its tractors, the company generates a significant amount of revenue from the sales of tractors. Global demand for tractors will increase 6.8% per year through 2016 to $122 billion. Between 2013 and 2017, Tractors sales in India and China will increase by 20% and 15%, respectively. To meet the growing demand for tractors, the company has purchased Bauer Built Manufacturing in order to expand their line of planter tractor attachments. This acquisition expands the company's product line and allows the company to sell more accessories and farm equipment and not just tractors. This product line expansion is consistent with the company's long-term growth strategy in providing complete agricultural equipment solutions.
To benefit from growing agricultural equipment sales, Deere is expanding its operation in China and India. Besides increasing dealers, the company also has plans to increase manufacturing footprint in each country to keep up with the increasing local demand. During 2013, the company opened seven new factories in India and China as well as introduced a record number of new products. Some of these new products are aimed specifically at emerging markets in order to build its customer share.
With a 40% market share, Deere dominates the competition in the agriculture industry and is the world's largest agricultural equipment manufacturer. Its main competitors are Caterpillar (NYSE:CAT), CNH Industrial N.V. (NYSE:CNHI), AGCO Corporation (NYSE:AGCO) and Kubota Corporation (OTCPK:KUBTY). Price competition is very little between firms. Instead, firms compete through research and development, strategic acquisitions and meeting emissions standards to try to increase their market share.
Deere's largest competitor, Caterpillar, has almost 2x the market share due to its international presence. Focusing on global developing markets is a sound strategy for Deere as they hold more market share in agricultural equipment, whereas Caterpillar holds more primarily in construction. Being the global leader in this industry, Deere has greater access to capital than its competitors therefore giving it at an advantage. It also has a very strong buying power that will give it a competitive advantage in the industry for years to come. The chart below represents the key statistics for Deere and its competitors.
|Return on Assets||5.96%||4.64%||3.04%||6.66%||5.82%||n/a|
The chart represents that Deere's stats are almost as good or better than its competitors. Deere is larger and more liquid than its competitors. Its operating margin and return on assets percentage is much higher than its competitors. Higher return on assets means the company is more efficiently using its assets which is a sign of great management. Deere's debt/equity ratio is much higher than its competitors, but this is not alarming in that the overall trend shows a greater increase in the company's assets over the term than liabilities and overall utilizes debt less than most of its group peers.
Deere is paying a nice dividend to its shareholders. With $3.5 billion in cash, it has the ability to pay dividends for at least four years. The company's dividend payout has more than tripled in the last 8 years, and still it is paying only 22% of earnings so there is a lot of room for the dividend to continue expanding.
Deere is a well established brand in the US and seems to be growing in the international market. Strong brand loyalty and global presence will keep this company growing for years to come. Much of the future growth will come from emerging markets such as China and India, and Deere is poised to take advantage. Population and income growth in these will increase demand for both food and infrastructure. Excellent growth, good growth future prospects means the company will keep its investors happy for years to come. In my opinion, Deere is a great investment for long run investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.