Tuesday, February 7, 2012

Deere & Co: $DE Cash Flow Valuation


Current Price: ~ $88/share
Projected Yield: ~ 1.87%




Based in Moline, Ill., Deere designs and manufactures agricultural, landscaping, construction, and forestry equipment. The firm typically finances a large portion of its equipment sales through its Deere Credit subsidiary. Founded in 1837 by John Deere, the company now employs more than 50,000 people around the world.         


Estimated WACC for the firm today is 10.52% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2002
1520
2003
1226
2004
799
2005
704
2006
207
2007
1275
2008
341
2009
677
2010
969
2011
646


Average Annual Growth FCF: ~ 46%
CAGR FCF: ~ -9%
Consensus Forecast Industry 5-Year Growth: ~ 18% per year
Consensus Forecast Company 5-Year Growth: ~ 14% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 49%

Scenario 1
Start at $1520 million FCF (the highest level of FCF achieved in the past 10 years), assume the company achieves a 5-year growth rate in FCF of 14% per year then 4% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1520
1
1733
2
1975
3
2252
4
2567
5
2927
Terminal Value
51175


The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $39385 million. If the firm's fair value of debt is estimated at $26278 million, then the fair value of the firm's equity could be $13107 million.  $13107 million / 404 million outstanding shares is approximately $32 per share and a 20% margin of safety is $26/share.


Scenario 2
All else being equal, assume the company achieves a 5-year growth rate in FCF of 14% per year, then 6.75% growth in FCF per year forever:

Discounted Cash Flow Valuation

Year
FCF $Millions
0
1520
1
1733
2
1975
3
2252
4
2567
5
2927
Terminal Value
88509


The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $62027 million. If the firm's fair value of debt is estimated at $26278 million, then the fair value of the firm's equity could be $35749 million.  $35749 million / 404 million outstanding shares is approximately $88 per share and a 20% margin of safety is $70/share.


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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