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Mini Equity Research Report
Mini Equity Research Report
Mini Equity Research Reports provides vital information about the financial performance of a company as well as other related information. As a result, they contain crucial information for potential investors who would like to determine a company’s performance (Hickman et al., 2013). Several investment banks pay equity analysis to compose the equity research report public organizations to prompt their individual customers on their stock performance. The equity research reports provide both negative and positive facts about the company to enable the investors or clients to make informed decisions. The equity analysts conclude by providing recommendations dependent on the strength of the positive variables while considering the risks from the negative impacts. The purpose of this Mini Equity Research Report is to give the introduction segment, including the stock recommendation and the conclusion part of the entire equity research report on John Deere (Deere & Company), to enable clients on the company’s stock performance.
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Introduction
The Mini Equity Research Report is on John Deere, which is the brand name of Deere & Company. Deere & company refers to a corporation based in the United States that engages in manufacturing construction, agricultural, and components such as drivetrains, diesel engines, and forestry machinery utilized in lawn care equipment and heave equipment (Deere & Company, 2021). On the other hand, the corporation offers financial services and other associated activities. The company was 87th in the Fortune 500 in America in 2009 was 329th across the globe (Deere & Company, 2021). The company is listed on the NYSE under the symbol DE. Despite the ongoing challenges linked to the COVID-19 global pandemic, the company delivered a year of strong financial performance. The company’s solid performance is credited with moving with innovation and speed to keep customers served, operations running, and people safe. The company managed to generate net sales of 35.54 billion, a 9% decline from $39,258 million in 2019. John Deere had a shareholder value-added of 1.56 billion, up by 3% compared to the previous year (Deere & Company, 2021). The company has had an excellent financial performance even though its revenue has slightly decreased through the global pandemic. Overall, the company is a good investment opportunity due to its ability to generate significant revenue and net income for investors.
Share Price and Market Capitalization
Market capitalization shows the market value of the outstanding shares of a publicly-traded company. It is important as it allows the investors to have a gist of the relative size of a given company versus the other (Hickman et al., 2013). Therefore, it measures the worth of a company on the open market in addition to being an indicator of how the market perceives the company’s future prospects as it shows what the investors can pay for the stock of the entity. On the other hand, a share price refers to the amount the company’s stock would cost. According to Yahoo Finance, the market cap for John Deere is $108.298 billion, while the current market price per share is $349.25 at close: September 24 at 4:00 PM EDT (Yahoo Finance, 2020). Therefore, the company is very valuable, which makes it worth evaluating as an investment opportunity.
Historical Financial Performance Facts
According to Week 1 – Assignment 3, Section 1: Financial Statement Analysis, there are numerous key historical financial performance facts about Deere & Company. The first fact is the consistent rise in the operating cash flow. The cash flows from operating activities increased from $1,820,300 million in 2028 to $2,019,000 million in 2019 and finally to $2,118,000 million in 2020. Operating cash flows are generated from the business’ normal operating processes. Therefore, the investors highly value the capacity of a company to generate positive operating cash flows. Specifically, the cash flows from operating activities can uncover the true profitability of a company. The financial metric is regarded as one of the purest measures of the company’s uses and sources of cash (Hickman et al., 2013).
Consequently, the rise in operating cash flows indicates the company is generating enough cash, which allows it the option to expand, build, and launch new products and services. In addition, an increase in operating cash flows implies there is enough cash for the company to pay out dividends to the investors to reward and bolster shareholder confidence, buyback the shares to affirm its strong financial position in the market, and decrease the amount of debt to save on interest payments. The operating cash flows are also positive, showing that the organization’s core business activities are thriving and will most likely continue with the same trend into the foreseeable future (Hickman et al., 2013). Besides, the operating cash flows provide an additional indicator or measure of profitability potential for Deere & Company. Investors usually look for companies with lower share prices, but their cash flows from operations show an upward trend over the recent years or quarters. Such a trend shows the corporation has rising levels of cash flow, resulting in higher stock prices in the future if better utilized.
The second key historical financial performance fact regarding corporation that can be derived from the company’s income statement is the consistent slight increase in the company’s total net sales and revenues as per the vertical analysis. For instance, according to Appendix B, the total net sales and revenues of Deere & Company as a percentage of each year’s net sales rose from 112% in 2018 to 113% in 2019 and finally to 114% in 2020. The common size income statement is vital in comprising the financial performance across the period. For instance, the dollar values of the company’s total net sales and revenues have fluctuated across the period. For example, the company’s total net sales and revenues rose from $25.5712 billion in 2018 to $26.792 billion in 2019 but then decreased to $23.677 billion in 2020. However, when a common size statement is used, the upward trend becomes evident, indicating a rise in the company’s total revenue across the period.
The overall financial performance of Deere & Company can be categorized as strong because of numerous reasons. Revenue growth refers to the decrease or increase in the sales of a business entity from one period to the next. Revenue growth depicts the increases or decreases over time, showing trends in business. A rise in revenue is usually a positive thing for any given business, as an increase in revenue is likely to translate to a surge in the company’s profits. Additionally, increasing revenue permits the organization to increase the margin of safety and get past the break-even point. By driving revenues higher, the company improves the profitability of its operations, thereby investing, acquiring talent, capabilities, or new products, expanding, and attaining even more profits and growth in the business. For instance, the net income attributable to Deere & Company as a percentage of the net sales rose consistently from 7% in 2019 to 9% in 2019 and 2020. The upward trend is an indication that the company’s overall performance is strong.
Summary of the Ratio Performance of the Company -Mini Equity Research Report
The overall performance of Deere & Company is strong because of the general upward trend in its ratios. The profitability ratios demonstrate the capacity of a business entity to generate net income from its operations, thereby gaining how well firms can achieve earnings (Hickman et al., 2013). The return on assets measures the net income a company produces using its total assets during a given period. The ROA fluctuated across the period, but it shows a general upward trend. The ratio only decreased in 2020 due to the COVID-19 pandemic. Nevertheless, the company is relatively efficient in using assets to generate net income. According to the ROA, the company generated $0,035 in net income in 2019, $0.0447b in 2019, and $0.0373 in 2020 for every dollar in assets. The ROE is significantly high; it was 22.79% in 2019 before increasing to 28.2% in 2019 and then decreased to 22.66% in 2020. Nevertheless, the ratio is higher than its rivals in the industry, implying that it is more efficient in using stockholders’ equity to generate net income. The operating ROI decreased from 10.26% in 2018 to 8.89% in 2020; however, it is still high, implying the investors can get high returns. Therefore, the company is more efficient than its rivals in using assets and managing liabilities to generate net profit despite the slight fluctuation in the values of its profitability ratios across the period. The decline in the ratio is attributed to the adverse economic impacts of the novel COVID-19 global; pandemic.
On the other hand, the liquidity ratios show the level with which a company can meet its financial obligations in the short term using its current assets. The current ratio and quick ratio are less than one indicating that John Deere cannot meet its short obligations using the near-term financial obligations. Therefore, the company is less liquid. Nevertheless, the company is profitable and can meet its long-term and short-term financial obligations with lots of ease. With a low current ratio of less than one, the company can raise extra finance or extend its time to pay its creditors (Hickman et al., 2013). Besides, raising extra finance using bank loans would enable the company to take advantage of the tax deductibility. Additionally, the company does not have any cash problems even though it has lower liquidity than its rivals in the industry. As a result, the company still has a strong overall ratio performance.
With regards to debt management, the company has a strong ratio performance despite using a significant amount of debts to finance its operations. The debt management ratio gauges the capacity of a business entity to sustain its operations indefinitely. The ratio is responsible for identifying going concern issues and the capacity of an entity to pay its bills in the long term (Hickman et al., 2013). Although both debt management ratios measure the capacity of a corporation to meet the financial obligations, they focus more on the company’s long-term sustainability than the current liability payments. Therefore, the ratios show the proportion of debts a company uses to the assets, equity, and earnings. The LT to dent equity and total debt to equity increased across the period, implying a rise in business risks. Despite being highly leveraged, with a debt ratio of more than two times its equity, the company has interest coverage of over 3.7 times across the period and hence will be able to pay for its interest expenses and other finance costs. Compared to the industry average, John Deere is highly leveraged.
The asset management ratios show that the company effectively uses its assets and manages its liabilities to generate revenue and hence has a strong ratio performance. The inventory turnover ratio is within the range of other companies in the industry. Inventory turnover indicates how the number of times the average inventories of an organization are sold or turned during a fiscal year. Despite decreasing in 2020, the ratio is relatively high, showing that John Deere is more efficient than some of its rivals in the industry in controlling its merchandise. The receivables turnover is high, indicating that Deere & Company effectively turns its inventories into revenues across the period. The company has a strong performance because it is more efficient than some in collecting accounts receivables. Finally, the cash flow per share and book value per share has increased across the period, implying a rise in the company’s valuation. Overall, John Deere is perceived by investors to have a better past and future performance than some of its rivals in the industry. Therefore, it is regarded as a good investment for any investor.
Valuation
According to Yahoo Finance. (2020), John Deere has a bet of 1.07. Beta measures the typical responsiveness of a firm to information that impacts the whole market. The beta is greater than 1.0, meaning the company has a higher sensitivity to the overall changes of the market.
The CAPM is used first in computing the required rate of return in determining the company’s valuation. Using a risk-free rate of 2.0%, a beta of 1.07 (as determined above), and a market risk premium of 6.0% as the company’s market capitalization is greater than $10 billion.
R = Rf + B (Rm)
R = 2.0% + 1.07*(6.0%)
R = 2.0% + 6.42%
R= 0.0842 or 8.42%
John Deere’s required rate of 8.42% is relatively below the 10.0% rate of return for large-cap companies. The Gordon constant growth model is used to compute the value of the share of stock of John Deere. According to the model: Mini Equity Research Report
Price = D*(1+g) / (r – g)
The company’s 5-Year Dividend Growth rate is 5.80% (g), while its most recent annual dividend is $4.2 per share (D) (NASDAQ, 2020).
Price = 4.2*(1+0.058) / (0.0842 – 0.058)
= 4.4436 / 0.0262
= $169.60
According to Yahoo Finance, the most recent market price per share is $349.25 at close: September 24 at 4:00 PM EDT (Yahoo Finance, 2020). The low-end computation of the valuation using the constant growth model formula is lower than the market price, which implies that the stock is overvalued. Therefore, the recommendation is to buy the stock of the company. Overvalue stocks are usually ideal for the investor who is looking to short a position. For instance, the investor can sell the share to capitalize on the expected decline in the share of stock price.
Conclusion
The Mini Equity Research Report provided the financial statement and ratio analysis of John Deere to provide an informed advice to the clients and investors who would be considering it. Deere & company refers to a corporation based in the United States that engages in manufacturing construction, agricultural, and components such as drivetrains, diesel engines, and forestry machinery utilized in lawn care equipment and heave equipment. According to Yahoo Finance, the market cap for John Deere is $108.298 billion, while the current market price per share is $349.25 at close: September 24 at 4:00 PM EDT (Yahoo Finance, 2020). The key historical financial performance fact about Deere & Company is the consistent rise in the net cash flows from operating activities. In contrast, the second one is a constant slight increase in the company’s total net sales and revenues as per the vertical analysis. The overall financial performance of Deere & Company can be categorized as strong because of the high revenue, increasing operating cash flow, and the general upward trend in the financial ratios. The valuation of the share is lower than its current market share price, showing it is overvalued. Therefore, it should be ideal for the investor who is looking to short a position. The recommendation is to the recommendation to buy because of high returns on investment. Despite having significant business risks, the company is a good investment opportunity to any investor who would like to short sell. The company is relatively more effective in using its assets to generate revenue and net profit that can be distributed to the investors as dividends.
