Before analyzing a company for investment, it's important to have a perspective on how well the business has performed. Because at the end of the day, if you are an investor, you are buying the business. The FAST Graphs™ presented with this article will focus first on the business behind the stock. The orange line on the graph plots earnings per share since 2005. A quick glance vividly reveals the historical operating record of the company.
Deere & Co (DE) is a world leader in providing advanced products and services and is committed to the success of customers whose work is linked to the land - those who cultivate, harvest, transform, enrich and build upon the land to meet the world's dramatically increasing need for food, fuel, shelter and infrastructure.
This article will reveal the business prospects of Deere & Co through the lens of FAST Graphs - fundamentals analyzer software tool. Therefore, it is offered as the first step before a more comprehensive research effort. Our objective is to provide companies that have excellent historical records and appear reasonably priced based on past, present and future data and expectations.
A quick glance at the graph itself and the orange earnings justified valuation line will tell the readers volumes about how well the company has historically been managed and performed as an operating business. Simply put, the reader should ask whether this example is worthy of a greater investment of their time and effort based on the data as presented and organized. The FAST Graphs' unique advantage is the graphical articulation of the price value proposition.
Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Earnings & Price Correlated Fundamentals-at-a-Glance
A quick glance at the historical earnings and price correlated FAST Graphs™ on Deere & Co shows a picture of undervaluation based upon the historical earnings growth rate of 13.2% and a current P/E of 11.1. Analysts are forecasting the earnings growth to continue at about 10%, and when you look at the forecasting graph below, the stock appears undervalued (it's outside of the value corridor of the five orange lines - based on future growth).
Deere & Co: Historical Earnings, Price, Dividends and Normal P/E Since 2005
Performance Table Deere & Co
The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return: capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 11.3% Annualized ROR (w/o Div) (green circle), long-term shareholders of Deere & Co, assuming an initial investment of $10,000, would have received an additional $2,565.91 in total dividends paid (blue highlighting) that increased their Annualized ROR (w/o Div) from 11.3% to a Total Annualized ROR plus Dividends Paid of 12.6% versus 4.7% in the S&P 500.
The following graph plots the historical P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as normal as it has been since 2005.
A further indication of valuation can be seen by examining a company's current P/S ratio relative to its historical P/S ratio. The current P/S ratio for Deere & Co is .96 which is historically normal.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
-
The rate of change (growth rate) of the company's earnings
-
The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 22 leading analysts reporting to Capital IQ forecast Deere & Co's long-term earnings growth at 10%. Deere & Co has high long-term debt at 75% of capital. Deere & Co is currently trading at a P/E of 11.1, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, based upon forecasted earnings growth of 10%, Deere & Co's share price would 197.12 at the end of 2018 (brown circle on EYE Chart), which would represent a 16.8% annual rate of total return which includes dividends paid (yellow highlighting).
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Deere & Co to an equal investment in 10-year Treasury bonds illustrates that Deere & Co's expected earnings would be 8.8 (purple circle) times that of the 10-year T-bond interest (see EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
Summary & Conclusions
This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although with just a quick glance you can know a lot about the company, it's imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.
Disclosure: Long DE at the time of writing.
