In this article our data partners Bridgewise analyse the agricultural equipment sector and zero in on Deere & Company NYSE:DE. The agriculture industry is a crucial sector of the global economy as it provides essential products such as food and clothing to people all over the world.
In recent years, the industry has undergone significant changes due to advancements in technology, increasing demand resulting from population growth and urbanization, and growing concerns about sustainability and environmental impact.
However, the industry faces various risks that come in different shapes and forms, such as weather-related events, fluctuations in commodity prices, and regulatory changes. Additionally, a significant number of farms are located in emerging markets, adding another layer of risk and uncertainty.
Due to the high volatility of the agriculture industry and its enormous growth potential, we have decided to examine companies that manufacture equipment for the sector. This approach provides an opportunity to benefit from the growth potential of the industry while reducing volatility.
Agriculture industry – Key trends to monitor
The world’s population is predicted to reach 9.7 billion by 2050, resulting in a rising demand for food and other agricultural products. This population growth is expected to be driven by developing countries in Asia and Africa, where urbanisation is also on the rise. The United Nations predicts that the world’s urban population will increase from 4.5 billion in 2021 to 6.7 billion by 2050.
Urbanisation is transforming the way we consume food, with a shift towards more processed food that requires more resources to produce. This trend poses significant challenges for the agriculture industry, which must adapt to these changes in consumption patterns. However, the agriculture industry is continually evolving and adapting to new technologies and innovations. Precision farming techniques, genetic modification, and advanced machinery are just a few examples of innovations that have the potential to improve crop yields and increase awareness of the environmental impact of agriculture.
As the industry continues to innovate, it has the potential to meet the challenges of population growth and urbanisation while reducing its environmental footprint.
Company in focus: John Deere (Deere & Co)
John Deere NYSE:DE is probably the strongest and most familiar brand in the agriculture equipment space. The company was founded in 1837 and has a market cap of $ 120 billion. The company is selling its products worldwide – in 160 countries. Upon examining John Deere’s fundamental analysis through Bridgewise’s reports, some intriguing insights have been revealed. Although the final rating is Hold, several areas of the company have scored significantly high.
The Hold score is evenly distributed among the three main statements: Balance sheet, Cash Flow, and Income statement. Some significant positive highlights include Free Cash Flow per share and Asset Turnover. However, there are also some notable negative highlights, such as net capex and cash and cash equivalents.
In this challenging macroeconomic environment, our focus remains on identifying high-quality businesses that can generate growth and returns throughout the economic cycle.
John Deere is a prime example of such a business, as it boasts strong income statement metrics. With an ROE of 41.7% and EBITDA growth of 15% in 2022, John Deere stands out both on a relative basis and compared to its peers. Moreover, the company’s free cash flow was exceptional, receiving a score of 93. We highly value cash flow-generating businesses, particularly in the current tight external liquidity
conditions.
However, according to Bridgewise’s analysis, the company scored poorly on CAPEX due to a 12% decline in 2022. The concern is that this reduction in CAPEX could negatively impact the company’s future growth.
John Deere – fundamental score highlights
Customised peers list
Although John Deere is categorised in the industrials sector, Machinery industry, using Bridgewise’s tools we can generate a precise peer list of companies worldwide that are involved in Agriculture equipment.
The customised peer list allows for further research and analysis of the specific agriculture equipment space that we want to analyse and invest in. It is interesting to note that Bridgewise has an overall positive view of this space, as evidenced by the high number of Buy and Hold recommendations for companies in this niche.
Caterpillar NYSE:CAT, another company with a strong brand and similar market cap, is also rated as Hold. However, its income statement score, which is an important metric for this segment, is significantly lower than John Deere’s.
On the other hand, Parker-Hannifin NYSE:PH is rated highly, although it falls within a significantly lower market cap range and also has a considerably lower income statement score. With Bridgewise, we are able to conduct in-depth analyses of peer fundamentals, regardless of the geography they operate in or the exchange they are listed on.
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