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Valuation of Deere & Company

I. COMPANY OVERVIEW

Background

Deere & Company was founded in 1837 by, blacksmith and inventor, John Deere. For over 135 years it has been symbolized by the yellow leaping deer trademark. Deere & Co. provides various types of equipment to customers around the globe; however, their six areas of focus are the United States and Canada, Europe, Brazil, Russia, India, and China. These focus areas provide Deere & Co. with a positive outlook on future sales as they will be the areas responsible for 75% of our world’s future growth.[footnoteRef:1] The company is comprised of three main business segments. The Agriculture and Turf segment provides agriculture and turf equipment such as utility tractors, loaders, and application equipment. It also supplies hay and forage equipment including mowers and golf course equipment. The Construction and Forestry segment supplies equipment such as backhoe loaders, articulated dump trucks, and log skidders. Lastly, the Financial Services segment provides support in financing sales and leases of various types of new and used equipment.[footnoteRef:2] [1: John Deere website-About us, http://www.deere.com/en_US/corporate/our_company/about_us/ ] [2: Yahoo Finance-DE, http://finance.yahoo.com/q/pr?s=DE+Profile]

Awards and Recognition

Throughout its existence, Deere & Company has prided itself on several key values, integrity, quality, commitment and innovation.[footnoteRef:3] In maintaining these values, the company has recently been acknowledged for its achievements by receiving several awards. [3: John Deere website-About us, http://www.deere.com/en_US/corporate/our_company/about_us/]

· 30 April 2015 – United Way Worldwide recognized Deere as one of two companies for their excellent employee engagement. They were given this honor through their overall participation of more than 2,000 employees during United Way’s Day of Caring in 2014.

· 27 April 2015 – Deere & Co. received the Dealer’s Choice Award for Full-line Manufacturers from the North American Equipment Dealers Association. They received this recognition for their exemplary performance in 12 operational categories.

· 9 March 2015 – The Ethisphere Institute recognized Deere & Co. as being among the World’s Most Ethical Companies for the ninth consecutive year for their ethical company culture and transparency.

· 12 November 2014 – The 2014 Global List of Top Companies for Leadership listed Deere & Co. as 16th in the world and 10th of the companies based in North America for their ability to cultivate a strong leadership environment. This was the third consecutive time that the company earned a spot on this list.

· 28 February 2013 – Deere & Co. was ranked 40th on FORTUNE magazine’s Top 50 Most Admired Companies list, which was created through an assessment of over 1,400 companies worldwide.[footnoteRef:4] [4: John Deere website-News & Media, http://www.deere.com/en_US/corporate/our_company/news_and_media]

Recent News

It was announced on April 20, 2015 that “John Deere Power Solutions will extend its generator drive power solutions with the introduction of four new PowerTech™ prime power generator drive engines”. These innovative engines meet the Final Tier 4 emissions regulations set by the U.S Environmental Protection Agency. Therefore, they allow more options to customers, especially those with space-constrained installations. The engines were showcased on April 20-25 in Paris at the INTERMAT.[footnoteRef:5] [5: John Deere website-News & Media, http://www.deere.com/en_US/corporate/our_company/news_and_media/ press_releases/2015/engines- drivetrain/2015apr20-new-engine-lineup.page]

On April 1, 2015, Deere announced its expansion of its 6M and 6R Series Tractors for the 2015 model. This expansion will “offer producers a wider range of horsepower, frame sizes, transmissions, hydraulics and other options”.[footnoteRef:6] On the same date, Deere & Co. announced that its L-Series Skidders will be entering the market. This new equipment provides “features that promise to increase uptime and productivity, while lowering daily operating costs for loggers”.[footnoteRef:7] [6: John Deere website-News & Media, http://www.deere.com/en_US/corporate/our_company/news_and_media/ press_releases/2015/agriculture/2015april1-6M-6R.page] [7: John Deere website-News & Media, http://www.deere.com/en_US/corporate/our_company/news_and_media/ press_releases/2015/forestry/2015apr1-l-series-skidders.page]

II. INVESTMENT OPPORTUNITIES AND RISKS

Investment Opportunities

Although demand for agricultural equipment is currently low, the forecasted trends in both population size and rising living standards produce a strong outlook for Deere’s business model. As population increases, urbanization is also forecasted to increase, which would leave smaller populations in rural areas and a larger need to mechanize farming. With the company’s strategy being to serve a larger global customer base, Deere may be able to serve the rising global food needs with their mechanical agriculture equipment.[footnoteRef:8] [8: John Deere website-Why Invest, http://investor.deere.com/our-company/investors-relations/why-invest/default.aspx]

Deere & Company’s actual earnings have exceeded analyst estimates for the past four quarters. In fact, in the past two quarters, Q4 2014 and Q1 2015, they surpassed estimates by 0.54 and 0.29 respectively.[footnoteRef:9] Even though the earnings estimates have been declining for the past four quarters, we can still see a positive outlook on Deere’s position. With sales having been decreasing for the past four years, the company has still been able to restructure and meet each earnings estimate, which speaks to the company’s ability even during a downturn of demand in their industry. [9: Yahoo Finance-Analyst Estimates, http://finance.yahoo.com/q/ae?s=DE+Analyst+Estimates]

Deere & Company’s one year stock chart shows a positive outlook for the company’s overall position. In November, a descending triangle began to form. Although this would usually forecast a continuing declination, the breakout from the pattern can be seen as a confirmation that the main upward trend will continue.[footnoteRef:10] However, these patterns are only vaguely represented, so reliance on them should be taken with due care. [10: Jack D. Schwager, Getting Started in Technical Analysis]

Investment Risks

The first major risk factor to take into account when analyzing Deere & Company is their short term growth rate. Analysts currently estimate their sales growth to be -16.80% in the current year and -1.80% in the following year. They also estimate overall growth of the company to be -41.10%, whereas the industry estimate is 9.20%.[footnoteRef:11] Compiling these forecasts with the historical sales growth rates for the past four years, we notice that the trend is continually decreasing. [11: Yahoo Finance-Analyst Estimates, http://finance.yahoo.com/q/ae?s=DE+Analyst+Estimates]

Focusing on individual segments of the company, the company’s agriculture equipment sales can be related to several factors that may produce uncertainties for farmers. These uncertainties would thus affect their consumer confidence and willingness to buy. Some of these factors include “worldwide economic conditions, demand for agricultural products, world grain stocks, weather conditions, soil conditions, harvest yields, prices for commodities and livestock, crop and livestock production expenses, availability of transport for crops, and the growth and sustainability of non-food uses for some crops”.[footnoteRef:12] With the current drought in California, one of the major growing regions of the United States[footnoteRef:13], agriculture equipment sales in the Western region could be severely impacted. [12: John Deere-Q4 Earnings, http://investor.deere.com/files/doc_financials/quarterly_earnings/2014_ fourthquarter.pdf] [13: USDA, http://www.usda.gov/oce/weather/pubs/Other/MWCACP/MajorWorldCropAreas.pdf]

In terms of the entire business, the company is affected by several factors including “general economic conditions in the global markets in which the company operates, especially material changes in economic activity in these markets; customer confidence in general economic conditions; foreign currency exchange rates and their volatility, especially fluctuations in the value of the U.S. dollar; interest rates; and inflation and deflation rates”.[footnoteRef:14] The current fluctuations in the dollar could have an adverse affect on Deere’s exports. [14: John Deere-Q4 Earnings, http://investor.deere.com/files/doc_financials/quarterly_earnings/2014_ fourthquarter.pdf]

III. HISTORICAL FINANCIAL PERFORMANCE

Consolidated Statements of Earnings and Balance Sheet

Consolidated Statement of Earnings

· See Appendix A1 for the statements which are based on October 2009 to October 2014.

Consolidated Balance Sheet

· See Appendix A2 for the statements which are based on October 2009 to October 2014.[footnoteRef:15] [15: Morningstar, http://financials.morningstar.com/income-statement/is.html?t=DE&region=USA&culture=en_US]

Common-Sized Statements of Earnings and Balance Sheet

Purpose of Common-Sized Statements

In performing the common-sized statements, we take each line item and express it as a percentage of revenues. This type of presentation of the financial data allows for a clearer representation of the information and the ability to compare across companies, the industry, as well as trends within the company itself. This type of analysis allows an analyst to overcome differences in firm sizes that may arise from cross sectional and time series analysis.[footnoteRef:16] Furthermore, in presenting the items as percentages, it allows for easier recognition of how much certain expenses account for revenue. [16: Ration Analysis, http://pages.stern.nyu.edu/~hfried/download/Ratios.pdf]

Discussion of Margins and Sales Growth

In looking at Deere & Company’s consolidated statement of earnings, we notice that the gross margin is fairly stable. It has fluctuated between 30.5% and 32.1% from the year 2010 to the year 2014 (See Appendix A1). This shows stability within Deere. Even as demand in their industry is shifting and uncertainty is increasing, they have still been able to keep costs of revenue to a relatively constant proportion of sales.

EBIT is a measure of profit before interest and taxes, and its margin can be used to determine the company’s financial health.[footnoteRef:17] Deere & Company’s EBIT margin was showing steady growth from 2010 until 2013 as it increased from 11.6% to 16.5% (See Appendix A1). These increases were due to decreasing sales, general, and administrative expenses as well as other operating expenses. However, in 2014, EBIT margin actually decreased to 15.2%. This decrease was largely attributable to a lower gross margin, but increases in R&D and other operating expenses also contributed to the difference. [17: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies]

Net profit margin is an overall determinant of the profitability of a company, as it accounts for income after interest, taxes, and gains or losses from discontinued operations. Deere’s net profit margin followed the same pattern as its EBIT margin, going from 7.2% in 2010 to 9.4% in 2014 (See Appendix A1). This just shows that its interest and tax expenses were consistent year to year, and had relatively the same impact on earnings from 2010 until 2014.

Deere’s sales growth rate has been steadily decreasing for the past four years. In 2011, sales growth was at 23.1%, but by 2012 the rate was almost cut in half, falling to 13.0% (See Appendix A1). Although this initial decrease is not surprising because that significant of a growth rate is not sustainable, by 2014, the growth rate was -4.6%. This decline does not prove to give a positive outlook for Deere.

IV. HISTORICAL NOPLAT, IC, AND FCF

Calculation of Historical NOPLAT

In order to value a company, there are two main factors that are needed for the calculations, return on invested capital and free cash flow. These factors are used to measure a company’s operating performance; however, the financial statements include operating performance, non-operating performance, and capital structure. Therefore, we must reorganize the financial statements in order to find solely operating performance.[footnoteRef:18] This reorganization results in NOPLAT or net operating profit less adjusted taxes. NOPLAT is a determinant of “the profits generated from the company’s core operations after subtracting the income taxes related to the core operations”.[footnoteRef:19] In order to calculate this essential amount, we began by adjusting EBIT with adding back amortization, making it EBITA. Then we deducted the operating cash taxes from EBITA to find NOPLAT. Operating cash taxes can be calculated by taking the reported tax amount and adjusting it for any tax shields on interest paid/received and further adjusting it for any increases or decreases in deferred taxes. We want to remove tax shields from free cash flow in order to calculate cash flows as if the company had no debt and was completely financed with equity. This allows for easier comparison of operating performances across companies, and the tax shields will then be included in the cost of capital through calculating WACC.[footnoteRef:20] [18: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies] [19: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies] [20: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies ]

Once we determined the value for NOPLAT, it was necessary we reconcile it to net income in order to substantiate the amount. The reconciliation process required adding back to net income the changes to deferred taxes and then adjusting the amount further with any after-tax interest paid and gains/losses from discontinued operations. Finally, we adjusted for any after-tax interest received (See Appendix E1 for all calculations). What we found form our calculations was that operating profit increased from 2011 to 2013, going from $2,276,272 to $5,130,233 (in thousands) respectively. Then in 2014, NOPLAT declined. This pattern resembles that of the net income, which is to be expected.

Calculation of Historical Invested Capital

When investors are analyzing a company’s ability to create value, they must look at the key factor that drives this ability, its return on invested capital (ROIC). Invested capital can be defined as “the cumulative amount the business has invested in its core operations—primarily property, plant, and equipment and working capital”.[footnoteRef:21] In order to calculate Deere’s invested capital, and ultimately its return on invested capital, first we had to find the operating working capital by determining the difference between operating current assets and operating current liabilities. Next, we found the total operating invested capital including goodwill. Finally, we added the total non-operating assets to find total funds invested in order to reconcile the amount with the debt and debt equivalents, or in other words the interest-bearing debt, and the equity and equity equivalents. What we found was that Deere’s operating invested capital has been growing steadily over the past five years. [21: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies]

Return on invested capital, on the other hand, has not had the same pattern. ROIC can be defined “as the return the company earns on each dollar invested in the business”. ROIC was determined by dividing the operating invested capital by the NOPLAT. Deere’s ROIC increased from 2011 to 2013 going from 6.80% to 12.17% respectively. However, in 2014, ROIC dropped significantly to 6.90% (See Appendix E2 for all calculations). We do not like to see ROIC drop as “the longer a company can sustain a high ROIC, the more value the company will create”.[footnoteRef:22] [22: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies]

Calculation of Historical Free Cash Flow

After determining ROIC, our next step was finding free cash flow, or “the cash flow generated by the core operations of the business after deducting investments in new capital”.[footnoteRef:23] Because free cash flow encompasses the cash flow available to all investors, it must be discounted using WACC in order to account for both the capital providers.[footnoteRef:24] We began our calculation of Deere’s free cash flow by initially finding the gross cash flow with adding back the non-cash depreciation expense. Next, we calculated the free cash flow by adjusting gross cash flow for operating working capital, capital expenditure, other assets, intangibles and goodwill, and accumulated comprehensive income. From 2011 to 2012, free cash flow saw a significant decrease; however, 2013 saw a complete turnaround as free cash flow went from [23: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies] [24: Chen and Jassim, "Pedagogical-cum-Analytical Tool for Teaching Business Valuation."]

-$3,990,290 to $3,446,223 (in thousands). 2014 again saw a decrease to -$339,572 (in thousands), due to large investments in capital expenditure during that year (See Appendix E3 for all calculations). After determining free cash flow, it was necessary we find cash flow to investors in order to reconcile the amount. We reconciled Deere’s cash flows by adjusting financing flows to find flows to debt holders, and then adding in the flows to equity holders.

COMPUTATIONS OF INTRINSIC VALUE

Assumptions

Panel A – Operating Assumptions

To begin our valuation of Deere, it was necessary that we make several operating assumptions. These included both estimations of ratios and forecasts based off of those estimates. First of all, we found our EBIT/sales for the year 2014, or in other words, our operating income as a percentage of revenue. This value was simply Deere’s current year EBIT divided by revenues, and was found to be 15.14%. As future operating income is essential to cash flow, we forecasted the next ten years and found the most reasonable estimate of the trend would be for EBIT/sales to increase in 2015 and then slowly decline for the following nine years (See Appendix F1). This is due to our assumption that Deere will need to increase research and development expenses in the future. With the declining demand in their industry, they will need to be extremely innovative in developing new products.

Our next line item in our valuation model is NOPLAT/sales. This value can easily be found by dividing NOPLAT by our total sales. Rather than estimating this value in future years, we were able to calculate it with our estimated future sales and estimated future NOPLAT. These line items will be described in more detail in the Panel B section of the report.

Depreciation/sales was our next key item requiring forecasted future values. This value could be found by taking current year depreciation and amortization expense from our Statement of Cash Flows and dividing it by our revenues for 2014. We calculated this percentage to be 3.62% and forecasted that it would remain stable for the next five years and then slowly decline (See Appendix F1). We made this assumption based off of recent capital expenditures. In 2014, Deere made its largest investment in capital expenditures for the past five years. We believe the depreciation on these assets will cause depreciation expense to remain stable in relation to sales for several years, and that large future capital expenditures are not likely, causing depreciation expense to decrease in the more distant future.

The next estimation that was essential to our valuation was working capital/sales, which was found by taking working capital and dividing it by sales. Our percentage in 2014 was found to be 100.30%. In forecasting future working capital/sales, we believed it would be practical to estimate a declination in the trend. In the past five years the percentage has dropped as low as 86.21%; therefore, we found it reasonable to assume the percentage would decline to 93.5% in the next ten years (See Appendix F1). Our next line item, working capital, was then found by applying our forecasted Working Capital/Sales to our forecasted sales from Panel B.

Our valuation model required we determine capital expenditures/sales. This value was simply capital expenditures as a percentage of sales, and was found to be 15.06% in 2014. As stated before, we assume that future capital expenditures will be minimal, so we believed a reasonable estimation in the trend would be for capital expenditure/sales to decrease in the next ten years (See Appendix F1).

Our next forecast was that of other assets/sales, which is determined by taking other assets as a percentage of sales. In 2014, this value was 4.15% which was a large decline from the 2013 value of 13.05%. We did not find it reasonable to assume the future would have such large fluctuations. Therefore, we forecasted future other assets/sales to remain fairly constant, only declining 0.21% in ten years (See Appendix F1). Following this forecast, we were able to calculate the line item, other assets, by multiplying our estimated other assets/sales by the forecasted sales from Panel B.

Our last line item, free cash flow/sales, was determined by taking free cash flow and dividing it by sales. Our value for 2014 was found to be -15.88%, and the following ten years were calculated by dividing our forecasted free cash flow by our forecasted sales. Both of these values can be found in Panel B and will be discussed in further detail later in this report.

Panel B – Inputs for Present Value Calculations

This panel of our valuation model was focused primarily on applying the forecasts of Panel A to current line items from the financial statements. These calculated values were then used to determine the future cash flows which were discounted to present value using our calculated WACC.

A key forecast in our valuation model was the sales growth rate, for without it we could not determine sales and thus could not calculate any of the Panel A line items that were based on a percentage of sales. In 2014, sales growth rate was -4.57%, a significant decline from the 2013 value of 4.53%. In forecasting future sales growth rates, we took into consideration the decreasing demand in the industry. We believe it is reasonable to assume that sales will decrease for the next two years, especially with the current drought in California, one of the major agricultural regions of the world. However, by 2017, we believe there is a high likelihood the drought will end, which would once again open up the Western region customer base. Therefore, we estimated sales would begin increasing up to 3.0% and then level out by 2021 (See Appendix F2). The first line item of Panel B was our sales. Once we forecasted the sales growth rates, we were able to apply them to the sales of 2014 and so forth in order to determine overall future sales.

Our next line item was EBIT, also known as operating income. In order to find EBIT for the next ten years, we used our forecasted EBIT/sales and applied it to the forecasted sales. We were then able to calculate our fifth line item, income taxes, by applying the marginal tax rate to our forecasted EBIT values. In order to find our marginal tax rate, we averaged the past five years’ marginal rates. These rates were originally drawn from ValueLine’s data page regarding Deere’s stock.[footnoteRef:25] Finally, we were able to calculate future NOPLAT by finding the difference between EBIT and the calculated income taxes over the next ten years. [25: Value Line - The Most Trusted Name in Investment Research]

The next four line items in our valuation model—depreciation, change in working capital, capital expenditures, and change in other assets—were all calculated by applying our Panel A estimates to current year line items from the financial statements. Once calculated, we were able to sum them in order to determine Deere’s future free cash flow. This led us into the last step of Panel B of our valuation model, finding the present value of our future free cash flows. This process required taking our estimated WACC, described in more detail later in this report, and calculating our discount factor. We used the formula , where t is equal to the year, and then we discounted free cash flow by dividing each flow by our calculated discount factor.

Valuation Model

Enterprise Model

The model we chose to use in valuing Deere & Company was the enterprise discounted cash flow model. Enterprise DCF can be described as “[discounting] free cash flow, meaning the cash flow available to all investors—equity holders, debt holders, and any other nonequity investors—at the weighted average cost of capital, meaning the blended cost for all investor capital”.[footnoteRef:26] This approach can then be modified to find equity holders’ value by deducting the nonequity investors’ claims on cash flow. We chose to use this model because it is especially effective when being applied to companies with a consistent capital structure, and Deere’s debt-to-equity ratio for the past five years showed very little variance at 0.03% (See Appendix B1). The Enterprise DCF model requires a five step process that we followed in order to find the intrinsic value of Deere’s stock[footnoteRef:27]: [26: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies] [27: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies ]

1. Finding the value of operations by discounting the free cash flow, using WACC as the discount factor:

2. Determining the enterprise value by identifying the non operating assets, such as excess marketable securities and other equity investments, and adding them to our value of operations:

3. Determining the value of equity by identifying the value of debt and other nonequity claims, such as unfunded pension liabilities and employee options, and subtracting them from the enterprise value:

4. Finding the intrinsic value by dividing the value of equity by the shares outstanding:

5. Comparing the intrinsic value to the market value:

The following sections of the report will detail the work done in each of the prior calculations.

Free Cash Flow for Ten Years

The first step in determining the value of operations was to find the future free cash flows and discount them using WACC. This process was completed in the last four line items of Panel B. However, in order to calculate the free cash flow, we were required to make forecasts based on our assumptions of how the company would act in the future. These forecasts and assumptions were illustrated in our work done in Panel A. Our calculated future free cash flows were highly fluctuating over the next ten years, and their sum was equal to $18,102,808 (See Appendix F3). This value provides the foundation for the EDCF valuation, and “is driven by revenue growth and ROIC.[footnoteRef:28] [28: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies]

Computation of Continuing Value

The second step in determining the value of operations was to calculate the continuing value and again discount it using WACC. We used two different methods to calculate this value and they are as follows, where t is equal to the year and g is equal to the sales growth rate:

Each of these formulas calculated different values that were then discounted using WACC in order to be included in the value of operations. The values were found to be $37,397,940 and $38,462,776 respectively.

Estimation of WACC

In order to discount both our future free cash flows and our continuing value, we used a common discount factor—the weighted average cost of capital. This discount factor is essential for companies financed by both debt and equity because it encompasses the risk faced by all investors.[footnoteRef:29] The equation we used in order to calculate WACC was as follows, where D is total debt, E is total equity, is the cost of debt, is the cost of equity, and is the marginal tax rate: [29: Koller, Goedhart, and Wessels, Valuation: Measuring and Managing the Value of Companies]

In order to determine the WACC for our valuation, we had to first find the cost of debt and the cost of equity. Both of these values required estimation.

The cost of debt can be calculated using different approaches. First of all it can be found by weighting the risks of the bonds outstanding. Because Deere did not have any bonds outstanding, we decided to take a separate approach. This approach required taking the interest expense and dividing it by the prior year’s interest bearing debt. The value we calculated using this method was 1.66%.

The cost of equity can be calculated using the capital asset pricing model with the following formula, where is the risk free rate and is the market risk premium:

We determined the risk free rate and the market risk premium through a survey of 6,237 analysts’ values used in 2013. These values were 2.40% and 5.70% respectively.[footnoteRef:30] [30: Fernandez, Aguirreamalloa, and Pablo Linares, Market Risk Premium and Risk Free Rate Used for 51 Countries in 2013]

Calculation of Beta for use in CAPM

In order to complete the CAPM calculation, we were required to calculate a beta for Deere. We were able to do this by running a regression on historical stock prices drawn from Yahoo. Once calculated, we unlevered the beta in order to find an industry beta. Then we relevered the beta to use it in our model. The final levered beta value we used was 1.65. The following information details how we understood our value to be a strong estimation of the true beta of Deere.

The beta we calculated for Deere using regression analysis was 1.26 (See Appendix B1). This means that it is riskier than the market by 26%. In other words, Deere is more volatile than the market, and should have higher highs and lower lows on average. Risk/volatility is a determinant of return; therefore, Deere should have a higher return than the market. However, this also means that Deere will have a larger loss when the market shows a loss.

In comparison to our calculated beta, Yahoo had recorded the beta for Deere at 0.98. Google, on the other hand, had a recorded beta of 1.23 for Deere. Lastly, ValueLine had an estimated beta of 1.05 for Deere. These varying betas were due to the use of different amounts and breakdowns of past company data. For example, in our calculations, we used the past five years of data, broken down on a monthly basis. Google most likely used a similar timeframe and breakdown, but Yahoo and ValueLine’s data must have varied. It is safe to assume, the true beta lies between 0.98 and 1.25.

In conducting the goodness of fit test, we found an F-value of 45.194, and its relative p-value of 8.55589E-09. These values allowed us to be confident that our beta value was indeed greater than zero. Our t-statistic was 6.723, a value greater than 1.96. Therefore, again we were confident that our calculated beta was a good representative value of the true beta for Deere.

Enterprise Value

The next step in our valuation model was to determine our enterprise value. As stated before, this value was found by summing the value of the company’s operations with the non operating assets, where the non operating assets included short-term investments, long-term investments, and prepaid pension benefits. We found the enterprise value using both the NOPLAT approach and the EBITDA multiple approach and they resulted in the respective amounts $57,281,048 and $58,345,884.

Value of Equity

Following the calculation of enterprise value, we were able to calculate the value of equity. Again, this value was calculated by taking the enterprise value and deducting interest bearing debt. For Deere this debt included short-term debt, long-term debt, pensions and other benefits, and other long-term liabilities. The values we calculated were $13,826,148 for the NOPLAT approach and $14,890,984 for the EBITDA approach.

Intrinsic Value

Once we determined the value of equity, we were able to calculate the intrinsic value. We calculated this value using three different approaches. First of all, we used the NOPLAT approach. This required us to take the value of equity and divide it by the number of shares outstanding, which amounted to $38.09. We followed the same process for the EBITDA approach and found the intrinsic value to be $41.02. Lastly, we used the relative valuation approach to calculate a third intrinsic value. This required us to estimate dividends and the 2016 price. We estimated the dividends by using historical dividends from ValueLine’s data output while also using the projected EPS and P/E values in order to calculate a 2016 price estimate.[footnoteRef:31] We were able to calculate an intrinsic value of $64.89 by discounting the dividends and share price using WACC. [31: Value Line - The Most Trusted Name in Investment Research]

Comparison of Intrinsic Value and Market Value

In order to determine whether a company is undervalued or overvalued, we compare the intrinsic value to the market value. For each of the three approaches, we found the intrinsic values to be less than the market value of $85.54 (See Appendix F3). This tells us that Deere’s stock is currently overvalued. For this reason, we should not buy Deere stock, but rather sell it if we were to already own shares.

V. CONCLUSION

In conclusion, we have shown how a valuation model can add value to an analysts understanding of a stock. We chose to use the enterprise discounted cash flows method due to its ability to encompass both debt and equity claims to cash flows through its discount factor, the weighted average cost of capital. We estimated and discounted the future cash flows and the continuing value in order to find the value of operations. Then, we were able to determine the enterprise value by adding in non operating assets, and the value of equity by deducting interest bearing debt. Finally, we divided the value of equity by the number of shares outstanding in order to determine the intrinsic value, and compared it to the market value. Overall we determined that Deere & Company is overvalued and we should not buy, buy rather sell if the stock were already owned.

VII. APPENDICES AND REFERENCES

Appendices

Appendix A1 – Deere Consolidated Statement of Earnings

Appendix A2 – Deere Consolidated Balance Sheet

Appendix A3 – Deere Consolidated Statement of Cash Flows

Appendix A4 – Deere Summary of Statements

Appendix B1 – Deere Calculation of Beta

Appendix C1 – Caterpillar Consolidated Statement of Earnings

Appendix C2 – Caterpillar Consolidated Balance Sheet

Appendix C3 – Caterpillar Consolidated Statement of Cash Flows

Appendix D1 – Caterpillar Calculation of Beta (Used for Industry Beta)

Appendix E1 – Historical NOPLAT

Appendix E2 – Historical Invested Capital

Appendix E3 – Historical Free Cash Flows

Appendix F1 – Panel A: Operating Assumptions

Appendix F2 – Panel B: Inputs for Present Value Calculations

Appendix F3 – Panel C: Valuation Calculations

Appendix F4 – Panel D: Sensitivity Analysis

References

"About Us." John Deere. N.p., n.d. Web. 30 Apr. 2015. <http://www.deere.com/en_US/corporate/our_company/about_us/about_us.page?>.

Chen, K.C., and Amir Jassim. "Pedagogical-cum-Analytical Tool for Teaching Business Valuation." Journal of Financial Management and Analysis 26.2 (2014): 4. Web. 6 May 2015.

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