To The Moon

$John Deere(DE)$ John Deere is a global leader in manufacturing agricultural, construction, forestry, and turf care machinery. The company also provides financial services and precision agricultural technology solutions.

4Q 2024 Earnings Overview

Quarterly Revenue

Financial Highlights:

• Net Sales and Revenues: $15.4 billion (up 33% YoY from $11.1 billion in 4Q 2023).

• Equipment Operations Net Sales: $11.1 billion (up 28% YoY).

• Net Income: $1.25 billion (down 47% YoY from $2.37 billion in 4Q 2023).

• Diluted Earnings Per Share (EPS): $4.55 (down 45% YoY from $8.26 in 4Q 2023).

Fundamental Analysis

FY 2024 Highlights:

• Revenue Growth: Net sales and revenues rose to $61.3 billion, up 19% year-over-year, driven by strong performance in large agriculture and construction segments.

• Profitability Decline: Despite higher revenues, net income decreased by 30% to $7.1 billion due to increased production costs, unfavorable pricing mix, and higher operating expenses.

• Margins:Gross margin faced pressure due to rising costs for raw materials and warranty expenses.Operating margins showed variance across segments, with significant challenges in the Production & Precision Ag and Small Ag & Turf units.

FY24 Finance Result

• Earnings Per Share (EPS): $25.62 (FY 2024), down from $34.63 in FY 2023, reflecting reduced profitability.

• Price-to-Earnings (P/E) Ratio: Moderating due to EPS decline, signaling potential undervaluation or caution in investor sentiment.

Business Segments Performance

• Production & Precision Agriculture:

  Segment revenue dropped sharply in 4Q 2024, with operating profits significantly impacted by warranty costs and pricing issues.Long-term growth potential remains strong due to precision technology adoption.

• Small Ag & Turf:

  Net sales fell 25% in 4Q 2024 due to lower consumer demand and rising input costs.Challenges include pricing pressures and currency fluctuations.

• Construction & Forestry:

  Delivered steady growth (~10% forecast for FY 2025 in North America construction equipment) despite margin pressures.

Q4 Result

Industry Segment Performance:

Production & Precision Agriculture: Net Sales: $4.3 billion (down 38% YoY).Operating Profit: Declined significantly due to higher warranty costs, unfavorable pricing mix, and increased production expenses.

Small Agriculture & Turf: Net Sales: $2.3 billion (down 25% YoY).Operating Profit: Negative due to rising costs, currency pressures, and reduced demand.

Construction & Forestry: Net Sales: $2.7 billion (down 29% YoY).Operating Profit: Hit by higher production costs, reduced volumes, and currency headwinds.

Financial Services: Net Income: $173 million (down from $190 million in 4Q 2023).Lower results attributed to higher credit provisions and interest rate impacts.

Declining EPS

John Deere's diluted earnings per share (EPS) declined significantly in 4Q 2024, falling 45% YoY from $8.26 in 4Q 2023 to $4.55. Below are the primary reasons for this decrease:

Quarterly EPS

Depressed Operating Performance

Operating profits dropped across major segments, including:

• Production & Precision Ag: Negative operating profit driven by higher warranty costs.

• Small Ag & Turf: Increased R&D and sales, administrative, and general expenses (SA&G) affected profitability.

• Construction & Forestry: Operating profits declined due to lower volumes and increased production expenses.

Challenges

Cost Pressures

• Rising Production Costs:

  Increased raw material and component prices are squeezing margins, particularly in the Production & Precision Ag and Small Ag & Turf segments.Higher warranty expenses have further impacted profitability.

• Labor and Supply Chain Issues:

  Workforce costs and retention challenges could affect operational efficiency.Global supply chain disruptions may lead to delays and higher costs for components and logistics.

Market Demand Volatility

• Agricultural Cycles:

  The agriculture market is inherently cyclical, affected by factors like commodity prices, weather conditions, and government policies.Demand for equipment can fluctuate, impacting revenue and inventory management.

• Geopolitical Uncertainty:

  Trade restrictions, tariffs, and international conflicts could disrupt key markets and supply chains.Unpredictable regulatory changes in major regions, such as Europe and South America, add to the risks.

Macroeconomic Headwinds

• Interest Rates and Financing Costs:

  Higher interest rates make equipment financing more expensive, potentially reducing customer demand.Deere’s financial services segment could see higher credit losses and reduced profitability.

• Currency Fluctuations:

  A strong U.S. dollar impacts the affordability of Deere products in international markets and can lead to reduced revenue from overseas operations.

Dealer and Inventory Management

• Dealer Network Dependency:Deere relies heavily on its dealer network for sales and service. Poor dealer performance can directly affect customer satisfaction and sales.

• Inventory Issues:Managing inventory levels (including used and rental fleets) can be challenging in fluctuating demand environments, risking overstock or understock situations.

Competition and Market Share Pressure

• Price Sensitivity:

  Intense competition in the agricultural and construction machinery space, especially in emerging markets, puts pressure on Deere to maintain competitive pricing.Competitors offering lower-cost alternatives or niche products could erode market share.

• Technology Leadership:

  Deere's reliance on innovation means continuous R&D investment is critical. Falling behind in automation, electrification, or precision technology could weaken its market position.

Investment Outlook FY2025

• Bullish Case:

  Strong leadership in precision agriculture and sustainable technologies.Long-term growth driven by global food demand and infrastructure investment.

• Bearish Case:

  Short-term profitability challenges due to cost pressures and margin compression.Volatility in global agricultural markets.

• In a flat case scenario, John Deere's financial performance and stock price would reflect a stagnation of growth, primarily driven by a balance of headwinds and tailwinds.

Limited EPS Growth

• Net Income Stagnates: Flat revenues and compressed margins result in stable net income between $5–$7 billion annually.

• EPS: Growth in EPS slows or halts, remaining in the mid-$20 range (e.g., $25–$26 for FY 2025).

Valuation and Investor Sentiment

Deere’s valuation reflects its market leadership and long-term growth potential:

• Dividend Yield: Competitive payout policy, offering stability to investors.

• Growth Prospects: Investments in automation and electrification expected to drive future earnings.

• Risks: Near-term challenges include fluctuating margins, global economic uncertainty, and higher costs.

• Price-to-Earnings (P/E) Ratio:

  Deere's EPS dropped to $25.62 for FY 2024 from $34.63 in FY 2023.A reduced EPS, alongside potential market price stability, may cause the P/E ratio to rise, indicating a relatively higher valuation or weaker investor sentiment.Industry Comparison:Deere's P/E ratio is typically compared to competitors like Caterpillar or AGCO to assess relative valuation.

• Price-to-Sales (P/S) Ratio:

  With FY 2024 revenues of $61.3 billion (up 19%), Deere's P/S ratio should reflect robust sales growth despite margin pressures.

Discounted Cash Flow (DCF) Valuation

The DCF approach evaluates the present value of Deere's future cash flows:

• Key Inputs:FY 2025 forecast for operating cash flow: $4.5–5.5 billion.Long-term growth rate: Reflecting sustained demand for precision agriculture and construction equipment.Discount rate: A higher rate may be applied due to macroeconomic risks and rising interest rates.

• Implication:Deere's future cash flows are supported by strong market leadership, but near-term cost pressures may temper its valuation.

Investment Thesis

John Deere represents a compelling investment opportunity for long-term investors seeking exposure to the agricultural, construction, and precision technology markets.

• Cash Flow Generation: Forecasted operating cash flow of $4.5–5.5 billion for FY 2025 ensures the capacity to fund growth initiatives and shareholder returns.

• Dividend Policy: A targeted dividend payout ratio of 25–35% provides steady income for investors while leaving room for reinvestment.

• Bullish Views: Analysts optimistic about Deere focus on its investments in automation, electrification, and market leadership in precision agriculture. Long-term demand for sustainable and efficient farming equipment is a key growth narrative.

• Bearish Views:

  Concerns are focused on short-term EPS declines, operating margin pressures, and global economic uncertainties.

Market Sentiment

Negative Sentiment

Profitability Pressures

• Deere’s 4Q 2024 EPS dropped by 45% YoY, raising concerns about cost management and margin recovery.

• Rising production and warranty costs, coupled with supply chain inefficiencies, have dampened investor confidence in short-term performance.

Macro and Economic Risks

• Interest Rates: Higher interest rates impact financing costs for customers and reduce demand for large capital expenditures, such as agricultural machinery.

• Currency Fluctuations: Strength in the U.S. dollar affects international sales and profitability, particularly in emerging markets.

Industry Cyclicality

• Cyclical agricultural and construction markets introduce variability in demand, leading to caution among investors during economic slowdowns or unfavorable commodity pricing environments.

Conclusion

Deere's financial performance would remain stable, underpinned by its leadership in core markets and strong operational foundation. However, the lack of significant growth would limit stock price appreciation, making it more attractive for income-focused investors than growth-seeking ones.

Deere's stock has shown resilience due to its strong brand and leadership position, but short-term volatility has increased following its 4Q 2024 earnings report, reflecting concerns over declining EPS and net income. Valuation may present a buying opportunity for long-term investors, while short-term traders could remain cautious until profitability stabilizes.