John Deere Strategic Analysis: SWOT, Industry & Outlook

Company Overview and Financial Profile

Deere & Company is an American corporation that primarily manufactures construction and agricultural equipment, alongside other products such as lawn care equipment. Founded in 1837, the company has grown into a formidable enterprise listed on the New York Stock Exchange. It currently employs approximately 68,000 people worldwide and holds the distinction of being the world's largest manufacturer of agricultural equipment.

Deere & Company's largest division is agricultural equipment manufacturing. Products include combine harvesters, tractors, balers, cotton harvesters, silage machines, planters and seeders, and sprayers. The second largest division is construction equipment, where the company manufactures excavators, loaders, backhoes, tracked loaders, bulldozers, graders, and skid-steers. Additional products include lawn mowers, utility terrain vehicles (UTVs), and diesel engines for various applications.

Institutional holders are the primary owners of Deere & Company. These include Vanguard Group, State Street Corp, Barclays Global Investors UK Holdings, Capital World Investors, and Wellington Management Company LLP, collectively holding approximately 64% of the company. Non-institutional holders account for the remaining 36% of shares.

The company recorded revenues of approximately $38 billion in fiscal year 2013 from a total equity base of $10.2 billion. For the financial year ended 2013, Deere reported a gross margin of 32% and a core operating margin of 16%. After deducting expenses, the company achieved a profit margin of 9% — a strong figure given that many companies report profit margins of roughly 10%. The company's pre-tax return on equity (ROE) was 53%, and its after-tax ROE was 34%. Return on invested capital (ROC) stood at 8.4%, which, although below many competitors, remains acceptable given the high return on equity.

The company reported a negative cash flow, evidenced by a levered free cash flow margin of -1.89%. Its debt-to-equity ratio of 340.28% indicates that operations are largely funded by borrowed capital. The liabilities-to-assets ratio of 82.46% means liabilities substantially exceed assets, raising concerns about long-term solvency.

Earnings per share rose to $2.116 in fiscal year 2013, up from $1.74 the previous year, driven primarily by revenue growth. The price-to-earnings ratio of 9.32 is considerably below the industry average of 12.96 and the sector average of 31.29. Over the last five years, the company's high price-to-earnings ratio was 22.1, compared to an industry average of 25 and a sector average of 43.5.

Deere & Company's dividend yield for fiscal year 2013 was 2.94%, against an industry average of 2.7% and a sector average of 1.73%. The company's five-year average dividend yield of 2.07% compares to an industry average of 2.27% and a sector average of 1.77%, representing dividend yield growth of over 13% over the past five years.

John Deere's mandate is to provide solutions linked to land. The company believes that since land is one of the fundamental costs of doing business, it is important to deliver essential solutions for landowners, builders, farmers, and ranchers. John Deere is committed to the success of those who cultivate and harvest land, as well as those who build upon it, primarily through its agricultural and construction equipment divisions.

Over the years, the company has diversified its product offerings to include forestry and turf equipment. These two segments support and enrich the experience of landowners by enabling them to operate more sustainably. The company's commitment to innovation positions it strongly as the equipment supplier of choice in the land sector.

John Deere's primary goal is to become the agricultural, forestry, construction, and turf equipment supplier of choice worldwide. The company pursues this goal by continuously improving its products and operational efficiencies. Its mission statement articulates this ambition directly:

"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."

External Analysis: Industry Background and PESTEL

The agricultural equipment industry has changed dramatically over the decades. In the early 1970s and 1980s, large-scale mechanization of agriculture drove significant business expansion. However, the industry's share of total employment has declined sharply: in the early 1900s, agriculture employed about 40% of the American population, whereas today it employs fewer than 3%. As a result of diminishing agricultural labor, technological advancement and mechanized farming have become essential. Key external opportunities and threats for John Deere include:

Opportunities:

International expansion presents a major growth opportunity, particularly in less developed markets in Africa, Asia, and South America where mechanization remains limited. Online markets also provide new avenues for reaching customers globally.

Threats:

The strength of the U.S. dollar weakens the competitiveness of American agricultural exports. The agricultural industry is heavily seasonal and cyclical, offering no guaranteed year-round returns. Additionally, the industry is significantly affected by U.S. economic conditions, interest rate movements, and government policy changes.

The agricultural and construction equipment sector is substantially affected by political decisions. Government policies that weaken the dollar can improve the competitiveness of U.S. agricultural exports, while high interest rate environments discourage farmer borrowing and reduce demand for farm and construction equipment.

Sales of agricultural equipment depend on several economic variables. The first is the price of farm commodities: when commodity prices are low, farmers have less incentive to invest in equipment whose cost cannot be recovered through returns. The second factor is the number of acres planted; large-scale farmers derive greater cost savings from mechanization than small-scale farmers. The third is crop yield — high-yielding crops justify the use of equipment more readily than low-yielding ones.

Farm and land prices also play a significant role. High land acquisition costs can reduce a farmer's capacity to purchase equipment. However, this depends on the farmer's debt management, since those with manageable debt levels may still finance equipment purchases through loans. Additional factors include agricultural trends, weather, and seasonal variation across states and crop types, which create uneven demand throughout the year.

John Deere operates across the United States and internationally. The company's brand is well-recognized globally and is strongly associated with the supply of quality agricultural equipment. This strong brand identity provides a meaningful advantage when entering new markets or retaining existing customers.

The agricultural equipment industry is considered mature, characterized by slow overall growth, stable dividends, and a high degree of consolidation. To achieve faster growth, industry players must invest in technological innovation, as consumers base purchasing decisions largely on cost savings derived from equipment use. Many players are working to reduce machine complexity by decreasing the number of components, thereby improving reliability and quality. Precision farming — the use of technology to optimize agricultural practices — is also a growing focus area for the industry.

Changes in U.S. agricultural policy substantially affect demand for farm equipment. The Federal Agriculture Improvement and Reform Act of 1996 restricted the acreage that farmers could plant, which constrained expansion opportunities and elevated land prices. This has compelled existing farmers to rely more heavily on equipment to maximize yields from available land. A government price support policy guaranteeing minimum crop prices has, on the other hand, enabled farmers to borrow more freely and invest in agricultural equipment with greater confidence in their returns.

The U.S. government has established strict standards for two-cycle engine emissions. Deere has responded with innovative small-engine designs that meet these requirements. Pressure from the Environmental Protection Agency (EPA) to reduce fuel consumption has also prompted the company to develop equipment with improved fuel efficiency, reinforcing its commitment to environmentally responsible manufacturing.

Competitive Rivalry in the Agricultural Equipment Industry

The agricultural and construction equipment industry is highly competitive, with 37 key players vying for market share. John Deere commands approximately 25% of the market, making it the second-largest player in the industry. Smaller companies hold portions of the overall market that collectively sustain significant competitive pressure on larger players.

Caterpillar is John Deere's principal competitor, holding approximately 35% of the market. Like Deere, Caterpillar operates distribution centers throughout the United States and across more than 200 countries, offering comparable products and services globally. Caterpillar has, however, concentrated more heavily on the construction equipment segment, including earthmovers, material handling machinery, general construction equipment, and heavy-duty engines.

Other notable competitors include Case Corporation, which manufactures light to medium-sized construction equipment — including loaders, backhoes, tractors, and self-propelled combines — and holds approximately 12% of the market. New Holland, a British company, holds approximately 10% market share. With the exception of New Holland, the other major competitors are American companies.