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Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Deere & Co. (NYSE:DE) fares in the ModernGraham valuation model.

DE Chart

DE data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 6/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3-year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $87.20
MG Value $293.52
MG Opinion Undervalued
Value Based on 3% Growth $110.55
Value Based on 0% Growth $64.80
Market Implied Growth Rate 1.47%
Net Current Asset Value (NCAV) -$1.03
PEmg 11.44
Current Ratio 2.39
PB Ratio 4.56

Balance Sheet – 1/31/2014

Current Assets $46,850,400,000
Current Liabilities $19,567,200,000
Total Debt $22,265,200,000
Total Assets $57,659,200,000
Intangible Assets $909,200,000
Total Liabilities $47,403,500,000
Outstanding Shares 536,430,000

Earnings Per Share

2014 (estimate) $7.50
2013 $9.09
2012 $7.63
2011 $6.63
2010 $4.35
2009 $2.06
2008 $4.70
2007 $4.00
2006 $3.08
2005 $2.94
2004 $2.78
Earnings Per Share – ModernGraham
2014 (estimate) $7.62
2013 $7.11
2012 $5.77
2011 $4.68
2010 $3.68
2009 $3.35

Dividend History

DE Dividend Chart

DE Dividend data by YCharts

Conclusion:

Deere & Co. is an excellent company that is suitable for either the Defensive Investor or the Enterprising Investor. The only requirement for either investor type that the company does not meet is the PB ratio. As a result, value investors following a ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into the company as well as other opportunities, such as through a review of ModernGraham’s valuation of Caterpillar Inc. (NYSE:CAT) or 5 Undervalued Companies for the Defensive Investor. From a valuation perspective, the company appears to be significantly undervalued, having grown its EPSmg (normalized earnings) from $3.68 in 2010 to an estimated $7.62 for 2014. This demonstrated level of growth more than supports the market’s current implied estimate of 1.47% earnings growth, leading the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.

Disclaimer: The author held a position in Deere & Co. (DE) but none of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Deere & Co.