Deere & Company: A Potential Investment in Regenerative Agriculture

Regenerative agriculture benefits the environment by removing carbon from the atmosphere and sequestering it in the soil. This practice plays a key role in addressing the climate crisis, and companies are increasingly incorporating it into their supply chains as part of their environmental, social, and governance (ESG) initiatives. While identifying companies that directly benefit from the transition of farmers from traditional to regenerative farming can be challenging, one potential candidate is Deere & Company.

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Deere & Company. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Deere & Company either. Thus, I have no personal stake in Deere & Company. If you want to purchase shares (or fractional shares) of Deere & Company, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $50.

The Business

Deere & Company, commonly known as John Deere, was founded in 1837 in Illinois and is a global leader in the manufacturing of agricultural machinery, construction and forestry equipment, and turf care solutions. The company operates through four primary business segments. The production and precision agriculture segment, which accounts for 41% of its revenue, provides advanced equipment and technology tailored for large-scale grain, cotton, sugarcane, and small-grain growers. The small agriculture and turf segment generates 22% of revenue and serves dairy and livestock producers, high-value crop growers, and property maintenance customers with products such as compact utility tractors and hay equipment. The construction and forestry segment contributes 26% of revenue, offering machinery for earthmoving, road building, and timber harvesting, including excavators and road rehabilitation equipment. The financial services segment, making up 11% of revenue, provides financing and leasing solutions for John Deere equipment, facilitating customer access and driving sales. Geographically, Deere & Company derives 55% of its revenue from the United States, followed by Latin America at 16%, Western Europe at 10%, Asia, Africa, and other regions at 7%, Canada at 8%, and Central Europe and CIS at 4%. The company’s moat is built on its 25% global agricultural equipment market share, strong brand recognition, and commitment to technological innovation. Deere & Company’s Smart Industrial Operating Model enhances customer value by integrating digital technologies and precision upgrades, which improve operational efficiency and sustainability. Its lifecycle solutions, which include parts, maintenance, and precision upgrades, help sustain product value over time while driving recurring revenue. The financial services segment further strengthens customer access and fosters long-term loyalty. By combining innovation, customer-focused solutions, and a diversified business model, Deere & Company maintains its industry leadership and secures a lasting competitive edge.

Management

John C. May is the CEO of Deere & Company. He joined the company in 1997 and has held various leadership positions before assuming the role of CEO in 2019. In 2020, he was also appointed Chairman of the Board. John C. May holds a bachelor's degree from the University of New Hampshire and an MBA from the University of Maine. In addition to his responsibilities at Deere & Company, he serves on the board of the Ford Motor Company. Under John C. May's leadership, Deere & Company has reached significant milestones. The company’s market capitalization has doubled, exceeding $100 billion for the first time. His achievements have earned him recognition, with Barron’s naming him one of the top CEOs in 2022. John C. May has led a substantial reorganization of the company, aligning it around specific crops and consolidating its software, data, and analytics functions under a new technology leader. This strategic transformation has allowed Deere & Company to introduce subscription services, fostering recurring revenue streams and enhancing margins. John C. May’s leadership demonstrates a strong ability to drive both growth and innovation. His strategic vision and the external recognition of his accomplishments provide confidence in his capacity to lead Deere & Company successfully into the future.

The Numbers

The first metric I will examine is the return on invested capital, or ROIC. Ideally, a strong company would consistently achieve a ROIC above 10% in all years. Deere & Company has historically struggled to meet this benchmark, which is partly attributable to its high debt levels. It is particularly disappointing that Deere & Company failed to deliver a ROIC above 10% from 2014 to 2020. However, it is encouraging to see a significant improvement in ROIC since 2020, with the company achieving above 10% for the past four years. One key driver of this improvement has been the implementation of the Smart Industrial Operating Model in 2020. This initiative has enabled Deere & Company to centralize its software, data, and analytics functions while introducing subscription-based services. These recurring revenue streams come with higher margins, which have had a positive impact on ROIC. Given the impact of these strategic changes, I believe Deere & Company is well-positioned to maintain a ROIC above 10% moving forward.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most significant of the four growth rates I used in my previous format, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. There have been periods where Deere & Company's equity decreased year over year; however, the company has consistently increased its equity every year since 2017, which is encouraging. Notably, Deere & Company achieved its highest equity ever in fiscal year 2024. While the year-over-year growth in fiscal year 2024 was the lowest since 2017, this is not particularly concerning, as the company continues to steadily grow its equity over time.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is worth noting that Deere & Company's free cash flow has not been positive in all years, with negative free cash flow recorded in 2017, 2018, and 2019. These negative results were due to high capital expenditures, fluctuating market demand, and rising operational costs, reflecting the cyclical nature of the industry in which Deere & Company operates. Encouragingly, the company has delivered positive free cash flow every year since 2019, despite facing challenging market conditions. In fiscal year 2024, Deere & Company achieved its third-highest free cash flow ever, despite it being a particularly difficult year. This performance highlights the company's resilience and operational quality. While the levered free cash flow margin has not reached previous highs, this is partly due to significantly higher capital expenditures in 2023 and 2024 compared to 2021 and 2022. As a result, this is not a cause for concern. The free cash flow yield is currently at its highest level since 2021 but remains relatively low, indicating that Deere & Company is trading at a premium price. This valuation will be revisited later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to evaluate whether a business has manageable debt that can be repaid within a three-year period. This can be assessed by calculating the ratio of long-term debt to earnings. Based on my analysis of Deere & Company, the company has a debt-to-earnings ratio of 6,09 years, which is more than double the three-year threshold. Typically, such a high level of debt would discourage me from investing in a company. However, Deere & Company’s high debt levels are primarily due to its financing operations, which are an integral part of its business model. Through its financial services segment, Deere & Company provides financing to customers, enabling them to purchase expensive machinery that might otherwise be unaffordable. This segment requires significant capital to support customer loans and leasing activities, resulting in elevated debt levels. Given this context, the high debt is reasonably explained and does not deter me from considering an investment in Deere & Company.

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Risks

Deere & Company's reliance on the agricultural cycle presents a significant risk due to the inherently cyclical and unpredictable nature of the industry. The agricultural market is influenced by various factors, including commodity prices, farm income, farmland values, crop yields, weather conditions, and government policies, all of which directly affect farmers’ financial health and their ability to invest in new equipment. When farm income declines as a result of falling commodity prices or adverse weather conditions, farmers often delay or cancel equipment purchases, leading to revenue volatility for Deere & Company. Farmland values and financing costs further impact this dynamic, as declining land values or rising interest rates can restrict farmers' access to credit, reducing their ability to finance equipment purchases. Global events, such as trade disputes or shifts in export demand, can also amplify fluctuations in commodity prices and farm profitability, adding another layer of uncertainty. Furthermore, government policies, including subsidies or changes in agricultural programs, can either support or hinder farmers' spending capacity, significantly influencing Deere & Company’s revenue. This cyclical nature of the agricultural market exposes Deere & Company to external shocks.

Competition poses a significant risk for Deere & Company due to the highly dynamic and competitive nature of the global agricultural, construction, and forestry equipment markets. The company faces challenges from both traditional competitors and new entrants, which could negatively impact its market share, profitability, and long-term growth prospects. Deere & Company competes in markets with a range of players, including global companies like AGCO, CNH Industrial, and Kubota, as well as smaller regional and specialty manufacturers. Each competitor brings unique product offerings and regional strengths, which intensify competition, particularly in price-sensitive areas or during economic downturns. In such scenarios, aggressive pricing strategies by competitors may pressure Deere & Company to lower its prices, potentially eroding margins and profitability. Emerging markets, such as Argentina and Brazil, further complicate the competitive landscape, as Deere & Company must navigate economic volatility and tailor its offerings to meet local customer needs in order to maintain growth. Another growing threat comes from non-traditional competitors. As agriculture becomes increasingly reliant on precision technology, companies specializing in software, automation, and connectivity - ranging from technology startups to established tech firms - are entering the market. These players often bring disruptive, innovative solutions that challenge traditional manufacturers like Deere & Company, unburdened by legacy structures. Deere & Company’s construction, roadbuilding, and forestry equipment segments also face intense competition from global heavyweights such as Caterpillar, Komatsu, and Volvo Construction Equipment. These companies compete aggressively for market share, adding further pressure on Deere & Company to continually innovate and maintain its leadership in these segments.

Damage to Deere & Company's reputation and brand poses a significant risk because customer trust and brand perception are critical to its long-term success. Deere & Company's globally recognized brand is one of its most valuable assets, helping the company maintain market share, foster customer loyalty, and attract new customers. However, negative publicity - whether justified or not - can erode this trust, damage its image, and have lasting consequences for its financial performance and customer relationships. Controversies surrounding issues such as right-to-repair policies, workforce reductions, and production relocations amplify this risk. For example, Deere & Company's right-to-repair policies have drawn scrutiny from regulators, advocacy groups, and farmers. Critics argue that these restrictions lead to unnecessary delays and costs for farmers during critical planting or harvesting periods, while Deere & Company defends the policies as necessary for safety and the protection of intellectual property. This ongoing debate has the potential to harm the company’s reputation within its core customer base. Similarly, decisions to relocate parts of its manufacturing operations outside the United States have sparked negative reactions. Recent production shifts to Mexico, resulting in over 600 layoffs across facilities in Illinois and Iowa, have raised concerns about Deere & Company's commitment to its U.S. workforce and local economies. While these moves are aimed at improving efficiency and reducing costs, they risk alienating employees, communities, and advocacy groups while attracting criticism from media and policymakers. Such controversies have the potential to damage Deere & Company's brand perception, erode customer loyalty, and weaken its competitive position.

Reasons to invest

Higher input prices present a compelling reason to invest in Deere & Company because they drive demand for the company’s precision agriculture solutions. As farmers face rising costs for critical inputs like seeds and fertilizers, they are increasingly motivated to adopt technologies that optimize resource use and minimize waste while maintaining or improving yields. Deere & Company is uniquely positioned to capitalize on this trend, given its strong focus on advanced farming technologies. For instance, Deere & Company’s ExactRate system, which applies liquid nitrogen with precision during planting, enables farmers to significantly reduce waste. This system has been estimated to lower fertilizer usage by up to 70%, offering immediate cost savings and improving farm profitability. Such innovations resonate strongly with farmers seeking to protect their margins in the face of volatile input costs. Management has highlighted robust demand for these precision agriculture tools, even during periods of rising input costs, underscoring their value and appeal. As input prices remain high or unpredictable, more farmers are likely to invest in Deere & Company’s solutions, creating a substantial long-term growth opportunity. By addressing a critical need for efficiency and cost control, Deere & Company not only reinforces its competitive edge but also aligns with its broader strategy of delivering value through innovation and sustainability. These factors position Deere & Company as a key beneficiary of the shift toward more resource-efficient agricultural practices.

Recurring revenue is a compelling reason to invest in Deere & Company due to the long-term financial stability, growth potential, and high profit margins associated with its subscription-based business model. Deere & Company’s shift toward offering subscription services for autonomous driving and precision agriculture technology represents a transformative change in its monetization strategy, aligning its revenue streams more closely with the value delivered to customers. These subscription-based solutions not only provide consistent and predictable revenue but also come with significantly higher profit margins compared to traditional equipment sales. This enhances Deere & Company's financial resilience and adaptability in a cyclical industry. Moreover, Deere’s pay-per-use and subscription models lower the upfront financial burden for farmers, making its precision technology solutions more accessible. For instance, Deere’s harvest automation features, which have been shown to increase productivity by up to 20%, deliver immediate and tangible value to farmers, reinforcing the attractiveness of these offerings. Management has emphasized that once customers adopt precision technology, they rarely return to older methods, creating a reliable and loyal customer base. This stickiness further strengthens the company’s ability to maintain recurring revenue over the long term. Management has projected that enterprise recurring revenue will grow to 10% of total revenue by 2030, highlighting the significance of this shift in Deere & Company's revenue composition. This transition not only diversifies its income streams but also positions Deere & Company for sustained growth and profitability.

Regenerative agriculture presents a compelling reason to invest in Deere & Company as it aligns with the global shift toward sustainable farming practices and offers significant growth opportunities. Regenerative agriculture focuses on improving soil health, enhancing carbon sequestration, and promoting sustainable land management. Studies have shown that farms adopting these practices can be up to 78% more profitable than conventional farms, driven by reduced input costs, improved soil productivity, and greater resilience to climate change. This increased profitability makes regenerative farming an attractive option for farmers. Furthermore, major corporations such as PepsiCo, Walmart, and Unilever are increasingly incorporating regenerative agriculture into their supply chains to meet ESG goals. This shift is accelerating the demand for agricultural equipment that supports sustainable farming practices. Deere & Company is well-positioned to capitalize on this trend with its suite of products tailored to regenerative farming principles. For instance, no-till drills help maintain soil health and biodiversity, while manure spreaders enhance nutrient recycling, reducing the need for synthetic fertilizers. Deere & Company’s commitment to innovation further solidifies its role as a key enabler of regenerative agriculture. The company’s advancements in electric-powered equipment and precision agriculture technologies, such as ExactApply sprayers and advanced seeding systems, align with the goals of regenerative farming by promoting efficiency and sustainability. As the adoption of regenerative agriculture continues to grow, Deere & Company’s ability to provide farmers and corporations with the tools needed to transition to these practices positions the company for significant long-term growth and profitability.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 25,62, which is from 2024. I have selected a projected future EPS growth rate of 12%. Finbox expects EPS to grow by 12,1% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 24, which is twice the growth rate. This decision is based on Deere & Company's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $472,05. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Deere & Company at a price of $236,03 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 9.832, and capital expenditures were 4.821. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 3.375 in our calculations. The tax provision was 2.094. We have 271,8 outstanding shares. Hence, the calculation will be as follows: (9.832 – 3.375 + 2.094) / 271,8 x 10 = $314,60 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Deere & Company's Free Cash Flow Per Share at $16,19 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $223,03.

Conclusion

Deere & Company presents an intriguing investment opportunity as a market leader with strong brand recognition, innovative technology, and capable management. While its historical ROIC has been impacted by high debt levels, the implementation of the Smart Industrial Operating Model has driven improvements, and it is expected to support higher ROIC moving forward. Additionally, the company delivered its third-highest free cash flow in fiscal year 2024 despite elevated capital expenditures. However, Deere & Company’s dependence on the agricultural cycle remains a significant risk. Its revenue is vulnerable to external factors such as commodity prices, farm income, weather conditions, and government policies, which can lead to revenue volatility during economic or agricultural downturns. Competition also poses a challenge, with traditional players like AGCO and Kubota, as well as non-traditional entrants focused on precision technology, threatening Deere’s market share and profitability. Disruptive innovations and intense pricing pressure, particularly in emerging markets, could exacerbate these challenges. Reputational risks persist as well, as controversies surrounding right-to-repair policies, workforce reductions, and production relocations have the potential to erode customer trust and damage its competitive position. Despite these risks, Deere & Company offers compelling reasons to invest. Rising input prices are driving demand for its precision agriculture solutions, which help farmers optimize resource usage, reduce costs, and protect their margins. The company’s subscription-based services for autonomous and precision technologies generate recurring revenue streams with high profit margins, ensuring long-term financial stability and fostering a reliable customer base. Moreover, Deere’s alignment with the global shift toward regenerative agriculture positions it to capitalize on trends in sustainable farming. These trends not only enhance profitability for farmers but also align with ESG demands from corporations and governments. Overall, Deere & Company demonstrates strong long-term growth potential, supported by its innovative business model and alignment with critical agricultural and sustainability trends. For long-term investors, adding shares below the Ten Cap price of $314 could represent an attractive opportunity to create value over time.

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