JOHN DEERE & COMPANY
This analysis of John Deere presents the external and internal analysis of the company including a SWOT analysis of the company. This analysis is then used to discuss informed strategic options and recommendations for John Deere.
The external analysis of John Deere includes the history of the agricultural industry, sources of competitive rivalry in the industry, and a PESTEL analysis of the agricultural and construction equipment industry. This section also presents the external factors (opportunities and threats) for John Deere.
The internal analysis of John Deere is based on the company's internal factors (strengths and weaknesses). It presents a brief overview of recent issues that are facing the company and how the company has reacted to them. It is a functional analysis of the internal activities of John Deere - operation, administration, finance, and marketing.
Strategic options and recommendations
This section is informed by the external and internal analysis of John Deere. This section provides the options for John Deere and recommendations for the company in the short-term and the long-term.
Deere & Company is an American company that majorly deals with manufacturing of construction and agricultural equipment alongside other equipment such as lawn care equipment. The company began in the year 1837 and has grown into a strong business that is currently listed on the New York Stock Exchange. The company currently employs close to 68,000 people all over the world and is the largest manufacturer of agricultural equipment all over the world.
Significant operational divisions and significant products
Deere & Company's largest department is the agricultural equipment manufacturing department. The company manufactures agricultural equipment such as combine harvesters, tractors, balers, cotton harvesters, silage machines, planters and seeders, and sprayers for use in agricultural activities. The second largest department is that of construction equipment where the company is a key player in manufacturing excavators, loaders, backhoes, tracked loaders, bulldozers, graders, and skid-steers. Other products include lawn mowers, UTVs, and diesel engines for various uses.
Company ownership and financial analysis
Institutional holders majorly own Deere & Company. These include Vanguard Group, State Street Corp, Barclays Global Investors UK Holdings, Capital World Investors, and Wellington Management Company LLP. These institutional holders own close to 64% of the company. Non-institutional holders hold the remaining 36% of shares.
The company has a revenue base of about 38 billion U.S. dollars in the year 2013 from a total equity of 10.2 billion U.S. dollars. In the financial year ended 2013, the company reported a gross margin of 32% with a core operating margin of 16%. After deduction of expenses, the company reported a profit margin of 9%, which is excellent considering most companies report profit margins of roughly 10%. The company's pre-tax return on equity (ROE) was 53% and their after-tax return on equity was 34%. The company's return on invested capital (ROC) is 8.4%, which though lower than most other companies is still good considering the high return on equity.
The company has a negative cash flow. This is evidenced by their levered free cash flow margin of -1.89%. The company has a debt to equity ratio of 340.28% meaning they are operating majorly on borrowed capital with their liabilities to assets ratio being 82.46% meaning they have 82% more liabilities than their assets, which is a situation where the company has borrowed more than its assets. This affects the long-term solvency of the company.
In the financial year ended 2013, the company had an earnings per share ratio of 2.116 up from 1.74 in the previous year. This was driven majorly by the increase in revenue for the company. The company's profit to earnings ratio is 9.32, which is way below the industry average of 12.96 and sector average of 31.29. over the last five years, the company has had a high profit-earnings ratio of 22.1 compared to an industry average of 25 and sector average of 43.5
Deere & Company's dividend yield for the financial year ended 2013 is 2.94 against an industry average of 2.7 and sector average of 1.73. The company's five-year average dividend yield is 2.07 compared to an industry average of 2.27 and sector average of 1.77. this means the company has grown their dividend yield by over 13% over the last five years compared to 16% growth in the industry and 13% growth in the overall sector.
John Deere's mandate is to provide solutions linked to land. The company believes in Karl Marx's economic theory and believes that since land is one of the four costs of doing business, it is important to provide essential solutions...
This is where the company began. John Deere is committed to the success of those who cultivate and harvest land as well as those who use it to build. The company majorly provides machinery for two broad sectors -- the agricultural sector and construction sector.
Over the years, the company has diversified their product offering to include two (2) additional equipment - forestry and turf equipment. These two businesses support and enrich the experience of landowners by supporting and strengthening them to be more environmentally friendly. The company is uniquely and strongly positioned to be the equipment supplier of choice in the land sector as a result of its commitment to innovation.
John Deere's main goal is to become the agricultural, forestry, construction and turf equipment supplier of choice all over the world. The company is doing this by relentlessly and constantly improving their products and the company's business efficiencies in order to achieve an exceptional operating performance. The company realizes that to achieve this it is essential for them to have a strong base of human power and thus they have a high-performance team culture and goes a long way in helping them achieve their goals.
John Deere's mission statement is as below:
"John Deere's mission is to 'Double and Double Again the John Deere Experience of Genuine Value for Employees, Customers, and Shareholders.' This will be accomplished by rapidly expanding global customer coverage on the farm site, worksite, home site, and turf site by being first in creating smart and innovative customer solutions through machines, service, and concepts. The company's business strategies of Running Smart, Running Fast, and Running Lean will help John Deere achieve its mission."
The agricultural industry has changed greatly over the years. In the early 1970s and 1980s, there was huge mechanization of agriculture that led to expansion of business within this industry. The industry, on the other hand, has seen a decrease in the number of people who are employed in this industry. In the 1900s, the agricultural industry employed about 40% of the American population but today it employs less than 3% of the population. As a result of the agricultural industry being less popular to the workforce, there has been a huge need for technological advances and many farmers are moving towards mechanized farming. The company's opportunities and threats are as outline below:
1. International expansion is a huge opportunity for the company to grow. Deere should expand into less developed markets in Africa, Asia, and South America where there is less mechanization.
2. Online markets provide the opportunity to reach more people.
1. Strength of the U.S. dollar weakens agricultural exports from the U.S.
2. The agricultural industry is heavily seasonal and cyclic in nature so no assured returns.
3. The agricultural industry is greatly reliant on the U.S. economy, interest rates, and government regulations.
Source of competitive rivalry
The agricultural and construction equipment industry has several players and John Deere is second to the industry leader. John Deere commands about 25% of the market. The industry has 37 key players all trying to win customers and increase their revenues through increasing their market share. Smaller companies have less strength to compete against industry giants but they also command a portion of the overall market creating strong competitive rivalry.
Caterpillar is John Deere's main competitor commanding about 35% of the market. The company is very comparable to Deere with distribution centers around the United States and over 200 countries. Their products and services are also similar all over the world. Caterpillar has however, concentrated more on the construction equipment segment with earthmovers, material handling machinery, general construction machinery, and heavy-duty engines.
Other competitors include Case Corporation that manufactures light to medium sized construction equipment including loaders, backhoes, tractors, and self-propelled combines. Case Corporation has 12% market share. New Holland is also a competitor with 10% market share. Apart from New Holland, all the other companies are American companies. New Holland is a British company.
Political environment of agricultural equipment sales
The agricultural and construction equipment sector is greatly affected by the political environment of the country. Since agriculture is one of the most diverse industries, it depends largely on political decisions that weaken the dollar thus strengthening the competitiveness of exporting agricultural produce from the U.S. Similarly, when the…
The company has grown substantially over the past several years in terms of revenues, profits and share price. In 2008, however, the company's share price has declined 45.3% from the beginning of the year. As the economic crisis spread overseas, Caterpillar's policy of geographic diversification is at risk of being insufficient to insulate the firm from global economic catastrophe. Maintaining the current path, however, recognizes the long-term strength of
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