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A Blue Chip With An Earnings Yield Around 10% And Strong Prospective Total Returns
Great article. Really enjoyed it and DE is a stock I'm researching at this time.
I like to think of DE as a “Think Decades not Quarters” company. Will be here for the next 100 years but has low growth est for next year so no manager wants to own it as they are trying to outperform now.
On the FCF debate. You have to take into account the large increase in Financing Receivables. This is basically Deere providing financing for its customers to buy its products. It is broken down in their recent 10k under current assets. Using the Morningstar line item of (Other Working Capital) for TTM this had a negative effect on FCF of -$1.246 Billion. In other words DE keeps loaning out more money to customers as their business grows. This is great but it hurts their FCF as the net financing receivables continue to grow compared to last year which has a negative effect on CF from operations (CFO). Damodaran states that you should cancel out all NWC (which would include this) when calculating FCF. It should not affect your FCF so normalize it and add it back. This line item has been highly volatile, last year it was -$1.1 Billion to FCF and the year before it added $973 Million to FCF. Morningstar calculates FCF as CFO- Capex and gets around $461 Million for TTM. Adding this -$1.246 Billion to $461 Million gives you $1.707 Billion for the TTM and a P/FCF of around 18.4. Much more reasonable than the current 68.17 P/FCF for the $461 Million FCF. Damodaran also tells his students to stay away from these companies with large credit arms (i.e. GE and F) because of the difficulty in valuing them. On the debt aspect, Deere takes out large amounts of debt and then transfers this debt to their customers which is their financing arm. This makes the traditional debt analysis difficult on DE. Any thoughts on how you would try to take into account the Financial Receivables in FCF is greatly appreciative. Deere may be the typical sum of the parts valuation company.
Oct 1, 2013. 02:38 PM
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